Catherine Reagor and Ronald J. Hansen

The Republic | azcentral.com

More than $35 million held in a fund created to help Arizonans hurt by bad lending and foreclosure tactics remains unspent more than two years after a landmark mortgage settlement with major banks.

Arizona Attorney General Tom Horne has spent 28 percent, or more than $13 million, of the $49 million in National Mortgage Settlement money under his control, through late July. Spending has accelerated this summer, according to an Arizona Republic review.

In recent weeks, the office has committed to spending almost $7 million more of the available funds. But although millions of new dollars have been committed, it may take months for the funds to help consumers.

It's hard to compare settlement spending in Arizona with that in other states. Most of the Arizona programs are designed to help homeowners facing hardship, worthy buyers needing a boost or veterans and others in need of housing aid.

Some states swept most or all of the money into their general fund; others invested in economic development or pursued various housing initiatives.

But Arizona's funds are being spent months after foreclosures have fallen to pre-crash levels.

Officials at the Attorney General's Office point to delays caused by the Legislature and by a legal challenge, saying a solid plan for distribution of the funds through a network of non-profit agencies is now in place.

Potential beneficiaries include tens of thousands of former Arizona homeowners, many of whom have found housing help elusive. Since the National Mortgage Settlement was announced in February 2012, about 30,000 metro Phoenix homeowners have lost their houses to foreclosure.

In a written statement provided by the Attorney General's Office, Horne counts nearly 15,000 Arizonans helped from the settlement as of last week. But a large portion of those were helped through the efforts of major banks working directly with consumers to revise their mortgages, as well as a separate legal settlement with Bank of America that largely defined who would get aid.

The largest of the programs under Horne's control had made loans to 58 consumers as of July 25.

Horne declined to be interviewed for this story. E-mail responses to questions were provided by Stephanie Grisham, Horne's press secretary and now his office's marketing manager for National Mortgage Settlement programs. In a statement from Grisham, Horne maintains the programs are set to meet his three-year target to spend the funds, which he first outlined in September 2012.

"The real estate market in Arizona has rebounded. We are one of the top 20 states in the nation for the housing market 'comeback,' " Grisham said.

Horne's critics say the slow rollout ensured that a spurt in marketing and distributing the money would occur in a year in which Horne was running for re-election. Marketing expenses grew quickly, by more than $800,000 from January through July, according to the attorney general's spending report. A TV ad promoting the housing-aid programs features Horne and accounts for $370,000 of the marketing burst.

Other critics contend that Horne, who repeatedly raised concerns about the "moral hazard" of helping borrowers in over their heads, never treated the settlement program with the urgency of his predecessor, Terry Goddard. Goddard once served as state director for the U.S. Department of Housing and Urban Development. As state attorney general, he played a prominent role nationally in the legal attack on banks' bad lending and foreclosure tactics, in part because of Arizona's status as one of the states hardest hit.

Andrew Loubert, a national housing counseling expert and CEO of the Phoenix-based Community Reinvestment Solutions, said Horne's programs haven't helped the state's distressed homeowners.

"The programs are too little, too late," he said.

Much-needed help

For many Arizonans, the flood of foreclosures that hit the state starting in 2007 seems like distant history, made more palatable by the 65 percent rise in median home prices since the market hit bottom.

But the mortgage settlement always had outsized importance for Arizona.More than 225,000 properties in metro Phoenix were lost to foreclosure in the crisis, one of the highest percentage losses of any area in the nation.

In February, Phoenix homeowner Kenneth Caravello, 65, read in an ­e-mail about one of Horne's settlement programs, operated by Neighborhood Housing Services of Phoenix. He had been in a car accident while working part time for an automotive-supply firm in early 2013 and is receiving disability checks. Without the part-time pay, Caravello was struggling to make the $250 monthly payment on his home-equity loan.

In May, Neighborhood Housing Services used money from the $20 million program it runs for Horne to pay off Caravello's $20,000 home-equity loan. With his Social Security payments, he can afford his monthly mortgage payment.

"I am so happy for the help, and my housing counselor was so good to me," he said. "I just wish I knew this help was available last summer. I had really been struggling to afford my mortgage payments since the accident."

Billions in aid

The national settlement funds were designed to help people in situations like Caravello's — people whose housing might be threatened or who had been caught up in the crash.

As the foreclosure crisis was ballooning, several attorneys general began planning a unified legal attack on major banks, building a case that claimed deceptive lending practices and lawbreaking during the foreclosure process. The settlement eventually involved every state but Oklahoma.

In February 2012, officials from 49 states and the federal government announced they had struck a $25 billion deal with five of the country's biggest banks — Bank of America, Citigroup, the former GMAC (now known as Ally Financial), JPMorgan Chase and Wells Fargo.

The national settlement had two key elements. Banks committed about $23 billion to rework loans and help more struggling homeowners. Through that program, according to a national auditor, Arizona borrowers have received $1.9 billion in help, though more than half of it ($1.1 billion) helped homeowners complete short sales — meaning they still lost their houses. This relief is not managed by Horne.

The other component of the national settlement set aside about $1.5 billion that went directly to the states, which were given complete discretion on how to use the money. Arizona's share, sent to the state attorney general, was $98 million.

Horne created an advisory committee on how to allocate the funds, and staff members also went to work.

"We started planning on how to spend the money right away," said Karen Scates, a former Arizona Housing Department assistant director, who worked in the attorney general's consumer division from early 2009 until January and helped research and create the programs funded by the settlement. "Immediately, our goal was to help homeowners."

A sweep and a plan

That help would have to wait on the Arizona Legislature. Lawmakers were dealing with deep state-budget shortfalls in 2012 and quickly signaled they intended to take much of the $98 million in settlement money. Three months after the national deal was announced, the Legislature approved a bill taking $50 million of the money to balance the state budget.

Many housing advocates were shocked because lenders still were initiating foreclosure proceedings on more than 4,000 houses a month in the Valley.

"We couldn't believe the Legislature would take money from families who needed help staying in their homes," said Val Iverson, executive director of the Arizona Housing Alliance.

Her group, along with the Arizona Center for Law in the Public Interest, sued to block the sweep. In October 2012, they lost.

Arizona lawmakers' actions looked modest compared with similar moves elsewhere. Lawmakers in California and Texas, for example, swept nearly all of their states' cash awards.

Even before a Maricopa County Superior Court judge ruled in the state's favor, Horne was publicly discussing his plans for the remaining $48 million, which with interest has grown to more than $49 million.

By September 2012, Horne said he would put $41 million toward keeping people in their houses and provide restitution for borrowers who were treated unfairly by lenders. Plans called for the money to be used for short-term cash assistance, loans and principal reductions for homeowners.

Despite announcing a plan, Horne took little action for months. When the Legislature took the $50 million in May 2012, it didn't formally send the rest of the money to Horne to spend.

By fall 2012, new foreclosures in the Phoenix area had receded to about 2,500 monthly. Horne ultimately waited 11 months for the formal legislative blessing to spend the money not taken in the sweep. By then, foreclosures in metro Phoenix had dropped into the hundreds per month.

While the Legislature delayed the settlement for a time, Horne commented that many people would not qualify for help under his programs. He said the goal of the distribution plan was to "avoid moral hazard." Horne didn't want to reward homeowners who in his view had acted irresponsibly.

This included people who had stopped making their mortgage payments even if they could afford them, and borrowers who took out bigger mortgages with plans to quickly sell for a profit. "The mere fact that you're underwater doesn't mean you shouldn't continue to make your payments," he said in September 2012.

While Arizona continued to refine its plans and seek contracts to use its funds, some states were further along in putting their money to work. Michigan started spending its $97 million in settlement funds on housing relief in August 2012.Colorado has spent more than half of its $50 million settlement on foreclosure aid and developing affordable homes.

But like Arizona, Nevada waited almost a year for legislative approval and has directly spent a quarter of its $57 million in settlement funds.

Slow start

Financial records from Horne's office show little activity in the settlement program's first year. In 2012, Horne provided Arizona State University with $200,000 to provide legal help for those battling foreclosure. The unused settlement funds earned more than $600,000 in interest by April 2013, when the Legislature formally gave Horne's office authority to spend the money it didn't sweep.

Horne's team put most of the money into nine program categories: enforcement and monitoring; housing counseling; legal services; marketing and public relations; the Mortgage Settlement Fund loan program; a veterans housing-assistance program; job training; relocation assistance; and ASU homeowner advocacy. About $5.6 million of the money remains reserved for changing needs, according to the July report from Horne's office.

The Mortgage Settlement Fund loan program is the $20 million centerpiece of Horne's plans for the settlement funds. It was created to lend money to struggling homeowners or to borrowers who had lost their houses due to unfair foreclosure practices but didn't qualify for any of the other federal programs available.

The contract to administer the fund was awarded in May 2013, a month after the Legislature sent the money to Horne. It went to Neighborhood Housing Services, a non-profit that offers housing counseling and financial assistance to homebuyers.

In October, Neighborhood Housing Services still was waiting for the go-ahead from Horne's office to promote the program and aggressively seek applicants.

The non-profit and other housing counselors that had received funds from the settlement asked when the loan program would be marketed so consumers would know to seek help.

"My staff and I have repeatedly gone to Horne's office asking for support," said Patricia Duarte Garcia, CEO of Neighborhood Housing Services. "It's very difficult to help homeowners when they don't know what we can do for them.

"We kept hearing there would finally be this big kickoff event in Phoenix," Duarte Garcia said. "But January came and went, and there was no event."

By that time, the Mortgage Settlement Fund had made five loans totaling less than $45,000, according to the attorney general's data. On July 25, Grisham said the program had funded 58 loans worth $1.7 million, with another $1 million approved.

The numbers are on the rise. Duarte Garcia said as of July 28, her non-profit had funded more than $2 million worth of loans and had another $1.3 million in loans approved but not yet funded. She said her non-profit has approved 32 applications for help from the fund so far.

Neighborhood Housing Services is currently working on 124 additional requests for aid.

Between the end of May and the end of July, more than $6.6 million was allocated to Duarte Garcia's program by the Attorney General's Office. This is millions more than Duarte Garcia said she had requested for immediate use.

Other programs had slow starts, too.

• A relocation-assistance program for low-income families displaced by foreclosure or at risk of homelessness has a $2.5 million budget. A contract, to Catholic Charities Community Services, was awarded in September. By February, it had helped one Yuma family.

• Horne set aside $600,000 for job training. In February, programs were launched by Arizona Women's Education and Employment and Pima County Community Services.Through July, 9 percent of the funds had been spent and 28 percent of the total had been obligated for future spending.

• Horne budgeted $2.5 million for helping veterans. In mid-July, Horne announced the program, which includes funds for remodeling homes of disabled veterans, would be administered by Habitat for Humanity Tucson and Maricopa County Human Services. The program is expected to launch this month.

While the programs were largely stalled last year, a marketing plan was developed by an outside consultant. By June 2013, LP&G, a Tucson advertising agency, had put together an 80-page plan to connect Horne's planned programs with Arizona consumers. Seven months later, the agency quit.

"We felt we weren't being as helpful as we would have liked to have been," said Colleen Cutshaw, a principal with LP&G. "Our marketing plan had been approved for the settlement money, but little was being done to implement it."

Grisham, Horne's press secretary, said the marketing needs were changing at the time, from research to advertising and promotion.

"Based on the next phase of marketing, which included a more aggressive effort to get the word out to people who needed help, I made the decision to hire a new marketing firm that would be able to focus on advertising our programs and promote our community events being held across the state," Grisham said.

A marketing shift

Marketing was understood to be a key element in getting the settlement funds distributed. Any program that hoped to reach distressed homeowners — and, in fact, all consumers — needed to be promoted in every medium, from fliers to special events to television ads.

Between January and July, marketing expenses were among the fastest-growing expenses in the attorney general's settlement fund, including more than $370,000 spent since March to broadcast an ad featuring Horne with an Arizona homeowner. In January, the marketing program had spent about $125,000, with another $30,000 obligated. By July, marketing spending topped $940,000 with another $97,000 obligated.

About the time LP&G quit in January, Horne shifted oversight of the marketing plan to Grisham from Kathleen Winn. Winn is a political ally who had been at the center of a campaign-finance probe that has engulfed Horne's office for years.

Integrated Web Strategy, a company Horne has used for website and publicity services during his political campaigns, took over the marketing-plan duties from LP&G.

Brochures explaining the mortgage-settlement-funded programs were printed in March, nearly 10 months later than the Attorney General's Office's original plans called for getting them out to the housing counselors.

Duarte Garcia of Neighborhood Housing Services said the marketing brochures have helped raise awareness of the loan program.

Also in March, Horne's office held a marketing event at Paradise Valley Community Center in northeast Phoenix to help homeowners access aid. In April, the day before Easter, the agency held a similar event in Phoenix's Deer Valley neighborhood.

The television ad launched in March replaced one put together by LP&G last summer that only included Horne's voice at the start.

Cutshaw said, "I don't know why the (attorney general) would pay to have another TV ad created. Our ad was vetted by the several people in that office and approved."

Grisham said she decided to kill the original ad. "It was not of a quality or concept that I felt was effective, and I didn't feel the message was resonating with those who needed help," she said.

A curious choice

The new ad told the story of Mesa resident Joyce Castillo on TV and in an extended version online. Horne appears in both versions, providing grist for his political opponents to say the ads promote him as much as his programs.

But Castillo also seems a curious choice because she did not receive help from Horne's National Mortgage Settlement funds.

In the ads, she connects the threatened foreclosure of her house to the adoption of two grandchildren, her husband's unemployment, her own knee-replacement surgery and joblessness.

"In about 2009, after I had lost my job, and we just had my husband's Social Security. We had nothing else," an emotional Castillo tells viewers. "We jeopardized our house being took from us. We got notices. We got phone calls."

"When I first heard about the National Mortgage Settlement, I could not believe it," she says in the TV ad. "We got our payments reduced and we kept our home."

In the extended online message, Castillo adds, "My dream would have been demolished if the National Mortgage Settlement would not have helped us."

But public records show Castillo's lender formally canceled her foreclosure in December 2011, two months before the National Mortgage Settlement was announced.

She did receive further help in restructuring her mortgage payment using resources from the settlement. But that aid came from the national pool of funds not controlled by Horne's office.

Like many during the housing bubble, Castillo refinanced and took equity out of her home at least twice between 2003 and 2007, according to property records.

Castillo said last week that she found help after contacting Winn, who is also a licensed loan officer.

Little assistance in early days

Castillo avoided foreclosure with help from Horne's office before the national settlement existed. Becky Bankert could not.

The Gilbert manicurist bought a house in 2008 with a 20 percent down payment. But by the end of the year, real estate was crashing and the economy was in recession. Her business plummeted.

She rented out a room in her home, sold her jewelry and struggled to keep making her payments while seeking help from her lender and the federal Home Affordable Modification Plan.

Bankert also applied for help from the government's Hardest Hit Fund administered by the Arizona Department of Housing and was turned down. She said she found two buyers offering a short sale that would have spared her the damage of a foreclosure, but her lender wouldn't approve the deal.

In 2010, her lender advised her to stop making payments so she would qualify more quickly for federal loan modifications. When she didn't get that help, the lender filed to foreclose in spring 2011.

Desperate, Bankert reached out to nearly every elected official in Arizona, including Horne. "I wrote letters to everyone, and reached out to anyone who could help me keep my house," said Bankert, who didn't have a second mortgage. "I knew the attorney general had funds to help homeowners and was in the process of working on a big settlement with lenders."

In a letter dated June 13, 2011, Horne's office thanked her for her information but offered no help.

"Vigilant citizens like you are the main source of information for our consumer fraud work. To keep track of this practice, we will keep your correspondence in our records. ... Again, thank you for your good citizenship," the letter said.

Bankert's house was sold at a foreclosure auction in August 2011 for about $20,000 less than she owed on her mortgage. Five days after the auction, the buyer flipped it for a $40,000 profit.

Bankert said she is interested in learning whether any of the settlement-funded programs can help her buy another home. She now rents from a friend so she can care for her sister, who has Alzheimer's disease.

"It makes me sick to see the attorney general has had the mortgage-settlement money for more than two years and still isn't helping a lot of homeowners," Bankert said.

To seek help from Arizona's mortgage settlement programs, call 602-542-5025 or go to azmortgageresource.gov.

Mortgage-settlement timeline

2009: In Mesa, President Barack Obama announces the first in a series of largely ineffective federal housing-relief programs.

February 2012: Officials from 49 states and the federal government announce a $25 billion deal with five of the country's biggest banks — Bank of America, Citigroup, the former GMAC (now known as Ally Financial), JPMorgan Chase and Wells Fargo. Most of the aid will be provided by the banks directly to distressed homeowners, but a portion of the funds is designated to each state. Arizona's share is $98 million.

May 2012: The Legislature approves a bill sweeping $50 million from the settlement to fund other state programs.

October 2012: The Arizona Housing Alliance and the Arizona Center for Law in the Public Interest lose a lawsuit challenging the sweep.

April 2013: The Legislature formally gives the attorney general the authority to spend the money it didn't sweep.

Source: Arizona Republic research

About the story

On June 13, 2013, Attorney General Tom Horne announced in a news conference plans to spend Arizona's share of the National Mortgage Settlement funds entrusted to his office. Last August, reporter Catherine Reagor began making inquiries to the area's housing non-profits about the distribution of the funds. She contacted the Attorney General's Office in October asking for an update. No information was made available. Readers also began questioning Reagor about the status of the $48.7 million in aid.

Reporters Reagor and Ronald J. Hansen filed a public-records request with Horne's office in mid-January seeking information on how the money was being spent. Information was received in early February, and updated information was provided in late May and late July.

The Attorney General's Office preferred to respond to all questions about the data by e-mail. The reporters interviewed consumers, housing counselors and non-profit leaders, program vendors and current and former government officials about the Arizona program and explored how other states spent their funds.

ON THE BEAT

Catherine Reagor covers real estate and growth.

catherine.reagor@arizonarepublic.com

Phone: 602-444-8040

Twitter: @catherinereagor

Ronald J. Hansen covers the Arizona economy.

ronald.hansen@arizonarepublic.com

Phone: 602-444-4493

Twitter: @ronaldjhansen