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Wednesday, October 24, 2012

How Foreclosure Relief Discriminates Against The Poor

The dreadful New Jersey Residential Foreclosure Transformation Act, revised from an earlier version that was vetoed by Governor Chris Christie earlier this year, is working its way through the New Jersey Assembly to threaten homeowner wealth once more.

The new bill passed the Assembly's Housing and Local Government Committee earlier today. It is one step closer to a full vote. But the new bill is no different from the old bill in that it threatens the meager homeowner wealth of the most vulnerable homeowners: minority, first-generation homeowners who may have strived the most for their piece of America.

Many Democratic representatives come from districts which trend towards lower-income and working-class, minority populations. Yet this Act stands to hurt minorities, the poor and the working class the very most. While middle-class and upper-class suburban homeowners will risk major wealth destruction, the proportion of total wealth that poor homeowners stand to lose from the Act may be nearly 100%. Poor and working-class homeowners --- many of whom are from minority, underprivileged backgrounds and worked their way up tirelessly into homeownership -- will be most vulnerable from this Act. That's because the bill allows the state to swoop in and convert formerly private property falling into foreclosure into affordable housing. Assuming that the state will seek to "help" the greatest number of people asserting a "need" for "affordable" housing (translation: they want free housing paid for by you and me), the state should seek to buy up the greatest number of foreclosed properties. Further assuming a finite amount of available funds, one would expect the state to concentrate on the cheapest homes which are in turnkey, move-in condition (and don't need rehabilitation). It stands to reason the cheapest buys would be in the cheapest markets and neighborhoods, tending to be the areas most populated by the poor and minorities.

The adverse impacts of the Act will be felt disproportionately in poor and minority areas. That is because the cheapest or most cost-effective conversion policy under the Act will concentrate foreclosure conversions in poor and minority neighborhoods. The first result will be to concentrate new affordable housing in these areas -- with the perverse effect of displacing some poor and minority homeowners who struggled honesty to maintain their mortgage payments with other poor and minority homeowners who will be able to buy homes at a serious discount to their prior value. The second result will be to concentrate halfway houses, rehab centers and other social welfare programs run by nonprofits -- and the often-undesirable people who use these services -- in these same poor, minority areas. What does that do to home values in these poor, minority neighborhoods? Of course, it drives them down further, obliterating the remaining home equity of homeowners and throwing more and more in these communities well underwater on their mortgages. If this isn't a financial persecution of minorities, I don't know what qualifies as one.

Some Democrats will claim the Act will help the needy. We already have heard about how all these nonprofit social welfare programs help the poor inner-city population, and that this Act will help those programs serve the needy. This is nonsense. First, these programs exist -- for the profit of their organizers. People are making a living -- and a profit, thank you -- off these nonprofits. (Don't believe me? Just look at what happens when you remove the state grant money from these nonprofits. No one does any fundraising. This is a complete system of relying on government handouts.) And most often, these nonprofits get their funding, all their funding, from the federal government, state government or county government grants. Pure pork. Pure waste. Any benefit to the community is incidental. Then consider that these nonprofits will buy properties from the state, after which the home value death spiral will accelerate (as I've explained before in writing that the Act will be the greatest single manmade act of wealth destruction to ever hit New Jersey).

The Act will have a clear disproportionate and discriminatory effect upon minorities. A discriminatory effect alone is sufficient to state a claim of a civil rights violation and make a constitutional challenge to a law. The Act is legally suspect and constitutionally challengable. The Democrats seem willing to sacrifice their inner-city loyal constituents to financial ruin in order for banks to make handsome fees from originating and servicing mortgages on converted foreclosures and for real estate agents to make commissions on sales.

Note that the major banking and real estate lobbies support the Foreclosure Transformation Act. But homeowner groups, taxpayer groups and the Tea Party are vigorously against it. It turns out that on this crucial legislation, the interests of minority homeowners and small business owners -- the bedrock of many working-class and poor communities -- are finding their strongest support in the Tea Party. Not the Democrats. And not Governor Christie. Remember that in the 2013 New Jersey elections.  

Eric Dixon is a New York lawyer, also admitted to practice in New Jersey. Mr. Dixon has testified before the State Assembly Appropriations Committee against the original Act.  Mr. Dixon regularly issues policy reports for the Financial Policy Council think tank, and has been published in RealClearMarkets.com and other outlets.

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