An Illinois law intended to help reduce foreclosures is drawing cries of discrimination from some of the people it is trying to protect, according to the Chicago Defender newspaper.

“Nearly 60 days after Illinois House Bill 4050 went into effect to supposedly protect consumers from predatory lenders, a coalition of Black and Latino city residents say the new law is actually destroying property values in select minority communities.”

The law is a pilot program that is being applied in 10 Chicago zip codes chosen for their high foreclosure rates, among other factors. But opponents say the law is cutting down on the legitimate loans available to residents of the 10 zip codes and thereby will lower house values by reducing the number of potential buyers who can qualify for a loan, creating a glut of unsold inventory.

The bill requires certain “high risk” mortgage applicants to receive credit counseling before taking out a home loan, and only applies to state-chartered loan originators, not federally chartered loan originators, according to the Chicago Association of Realtors.

Local mortgage planning specialist and blogger Dan Green created the map to the right showing where mortgage fraud has been reported in Chicago (black dots and orange fill) and where the pilot program is being applied (red fill). Also below is a heat map RealtyTrac created of the Chicago area based on the number of total foreclosure filings (defaults, sales and REOs) in September.

While some of the legislators involved in pushing through the bill continue to defend it, the fallout from this law will likely make them think twice about unforeseen repercussions of enacting similar legislation in the future. One such law is Illinois Senate Bill 2349, which passed back in June and is scheduled to become effective January 1, 2007. This law is aimed at providing “consumer protections against property fraud for homeowners who are in default or foreclosure,” according to a press release put out by Illinois Gov. Rod Blagojevich. The ways it does that is it:

• Limits the amount so-called mortgage rescuers can make to 125 percent of the total debt on the home if the homeowner buys back the home from the rescuer.

• Requires that all mortgage rescue companies provide disclosures and give homeowners the right to cancel contracts, and increases penalties for violations.

• Requires that the mortgage rescuer provide the homeowner with at least 82 percent of the value of the home if the homeowner is not able to buy back the home.

It wouldn't be surprising if this law, like HB 4050, resulted in some harmful consequences to the very people it's trying to protect. By applying such stringent standards to foreclosure property purchases, this law could drive away not only the scam artists but also the ethical buyers and investors who want to purchase foreclosures. That will leave defaulted homeowners with fewer options to avoid foreclosure, let alone recoup any equity they might have in their home.
       
Chicago Foreclosure Rate Heat Map -- Sept 2006