Diverting Settlement Funds Hurts Those Who Need It Most

State governors and legislators should use money from the national foreclosure settlement fund for foreclosure prevention. Diverting that money into other budget areas will hurt state economies, and will do nothing to help the people who need assistance today.

May 18, 2012

At the heart of the recent $25 billion national foreclosure settlement is the promise of $2.5 billion in new state funding for foreclosure prevention. This funding is meant to provide immediate relief to millions of distressed homeowners. As the Brennan Center has explained, putting this money towards foreclosure counseling and legal services is a smart investment in our future, which will lift state budgets and our national economy.  But the New York Times is the latest to report that a growing number of states – 15 at the last count – have diverted (or are planning to divert) millions away from housing programs and into general coffers to fill budget shortfalls.

Some governors and lawmakers have defended their decision to redirect the settlement money, arguing that revenue into state general funds translates into better economic situations for states overall – and thus, for struggling homeowners. In Georgia, Governor Nathan Deal decided to use the funds for business development instead of direct services to homeowners. A spokesman for Deal said that spending the money on attracting new companies would be the best way to prevent foreclosures. 

But these types of policies will provide no immediate relief to the millions of people currently struggling to stay in their homes. Kimya Gentry, an accountant from South Carolina who just lost her job, told CBS, “It's a little scary not knowing if I'm going to be able to pay my mortgage or pay my bills or anything, you know, take care of my children.” South Carolina’s current House budget, if it stands a Senate vote, will send most of its $32 million from the settlement into a fund like Georgia’s that focuses on attracting corporations to the state. This will do nothing to alleviate the day-to-day struggles of distressed borrowers like Kimya.

States that stray from the settlement terms navigate a slippery slope between projects that indirectly help affected homeowners, and projects that represent entirely unrelated budget priorities. In Arizona, for example, $50 million – over half of that state’s settlement share – has been diverted to the general fund for purposes unrelated to housing. Arizona lawmakers initially proposed using the money for prison construction. They chose to do this despite the fact that Arizona posted the highest foreclosure rate in the nation in March. And despite the fact that a February 2012 report concluded that Arizona overpaid for private prisons in 2008 and 2010 by about $10 million, and that the services it received were woefully lacking. The state’s auditor general documented 157 serious security failings across five private facilities that hold in-state prisoners. The fact that lawmakers are more willing to spend public funds on wasteful prison construction, rather than invest in foreclosure prevention that actually lifts up poor communities – and, not incidentally, prevents an increase in crime - shows the need for a shift in our public priorities.

According to Alan Jenkins, executive director of the Opportunity Agenda, redirecting settlement funds could also have a racially discriminatory impact: “If you dump all of these funds into the general coffers, the African-American homeowners are not going to benefit in any real way because they represent such a small percentage of the larger state.” Yet, in many cities, black homeowners were disproportionately impacted by the foreclosure crisis. In Atlanta, for example, properties in African-American neighborhoods were almost five times more likely than homes in white neighborhoods to lack a “for sale” sign. In New York City, a map of distressed homeowners illustrates starkly that this foreclosure crisis is concentrated in communities of color.

It is imperative that State governors and legislators recognize the importance of using the settlement as it was intended – to provide immediate relief to distressed borrowers, and to lift up our hardest hit neighborhoods. Diverting the money will hurt state economies in the long run, and will hurt those who most need the settlement funds today.