Earlier this year, state and federal law enforcement officials negotiated a historic legal settlement with the Big Banks that had abused the rights of homeowners during the foreclosure crisis. As part of this settlement, the Big Banks agreed to pay $2.5 billion in penalties to the states for programs to help prevent foreclosures.
Sadly, in many states these funds are now at risk of being diverted away from helping struggling homeowners. So far, only 27 states have said they will use the money for housing-related programs such as housing counseling. Another 15 states have said that they will use all or most of the money for other purposes.
To be sure, state budgets are under pressure because of the economic recession caused by the Wall Street financial crisis. But a failure to use the settlement money to help struggling homeowners is shortsighted. Foreclosures reduce neighborhood property values, and this reduces property tax collections and economic growth.
State officials who divert the settlement money away from housing programs should be ashamed. Middle-class homeowners and particularly communities of color have been decimated by the foreclosure crisis. Rather than divert these badly needed resources to close budget holes, states should tax the top 1 percent who are now doing better than ever.