States Must Use Foreclosure Settlements to Actually Prevent Foreclosures

While studies continue to reiterate the value of foreclosure counseling and legal services, states continue to divert funds intended for foreclosure prevention into other programs. The smart and logical fiscal response is to use the foreclosure settlement funds for the prevention programs they were intended for.

May 23, 2012

A recent ProPublica investigation found that 40 percent of the mortgage settlement funds intended for local foreclosure prevention programs are being used to fill state budget deficits, or to finance programs unrelated to the foreclosure crisis.

ProPublica contacted every state that participated in the settlement and released an interactive map to illustrate how states are spending their money. Comparing ProPublica’s map to a national map of foreclosure rates for the month of March (the most recent month for which stats are available), highlights some disturbing patterns:

  • Five of the 10 states with the highest foreclosure rates in March (California, Utah, Arizona, Wisconsin, and Georgia) are diverting substantial portions of their funds to fill budget gaps or to fund programs unrelated to foreclosure prevention. All of those states, except for Arizona, are diverting more than 90 percent of their funds. (Arizona is diverting 51 percent).
  • All of the abovementioned states also sported some of the highest average delinquency rates in the country from 2008-2011. Delinquency rates indicate the percentage of loans that were most troubled — more than three months behind or in the foreclosure process — during the crisis California had a 9.41 percent delinquency rate, and Arizona had a 9.75 percent delinquency rate. These were both well above the national average of 8.06 percent during the national foreclosure crisis.

Meanwhile, the U.S. Department of Housing & Urban Development (HUD) released a report assessing the benefits of housing counseling on families struggling to prevent foreclosure. HUD found that housing counseling significantly improved the likelihood that distressed homeowners would remain in their homes. With a counselor’s help, 69 percent of the people who received counseling found a  mortgage remedy, and 56 percent were able to catch up on their mortgages. Nearly 70 percent of homeowners who sought counseling before becoming delinquent in their payments caught up  on their mortgage payments and were still in their homes at the 18-month follow-up period. Only  30 percent of the homeowners who were six or more months behind at the time they entered counseling were in their home and current at follow-up.

As studies continue to reiterate the value of foreclosure counseling and legal services, states continue to divert $974 million from the settlement away from these vital programs. This defies logic. The foreclosure crisis continues to strangle state economies. The smart fiscal response is to invest in foreclosure prevention.