Why is the foreclosure rate so high in Indiana?

Tatom, John (2007): Why is the foreclosure rate so high in Indiana? Published in: Networks Financial Institute Report (28 August 2007): pp. 1-19.

Abstract

The state of Indiana has had a major foreclosure problem, especially since the 2001 recession. As the nation confronts an emerging surge in foreclosures associated with an explosion of subprime loans in 2004-06, the Indiana foreclosure rate is likely to surge to record territory. Two neighboring states, Michigan and Ohio, join Indiana in having the nation’s highest foreclosure rates. In fact, Ohio has led the nation since 2003, knocking Indiana into second place since then. Meanwhile, Michigan climbed to third place since mid-2006. This report provides a perspective on the crisis in Indiana and its sources. The principal source of the high foreclosure rate in Indiana is the predominance of high risk loans, originally from FHA and later from subprime lenders. Slow house price appreciation and slow employment growth are statistically significant factors accounting for state foreclosure rates, but these factors have not been especially weak since 2001 and they are highly correlated with the share of risky loans. Other factors that are frequently mentioned do not fit the pattern of emerging foreclosure from 1995-2006, or they are not large enough to have had much substantive effect on the overall foreclosure picture. These include auto sector and manufacturing production and employment or predatory lending and mortgage fraud. Education of borrowers, especially first-time buyers, and the education of lenders in traditional prudent lending practices are more likely to foster lower foreclosure rates than other remedies and to do so without reducing homeownership rates.

• Item Type: MPRA Paper
• Institution: Networks Financial Institute at Indiana State University
• Language: English
• Keywords: Foreclosure rate; mortgage finance; mortgage risk
• Subjects: G - Financial Economics > G1 - General Financial Markets

References

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Indiana Mortgage Bankers Association (IMBA), “Indiana Mortgage Foreclosure Rate,” January 9, 2003, processed.

National Association of REALTORS, “Rising Foreclosure Rates in Indiana: An Explanatory Analysis of Contributing Factors,” preliminary version, March 2003, and final version, March 2004.

Sharick, Merle, Jennifer Butts, Michelle Donahue, Nick Larson, and D. James Croft, “Ninth Periodic Mortgage Fraud Case Report to Mortgage Bankers Association,” Mortgage Asset Research Institute, LLC, April 2007.

U.S. Government Accountability Office, Federal Housing Administration, Decline in the Agency’s Market Share Was Associated with Product and Process Developments of Other Mortgage Market Participants, Washington D.C. GAO-07-645, June 2007. .

Weicher, John C., “The Long and Short of Housing: The Homeownership Boom and the Subprime Foreclosure Bust,” Networks Financial Institute Policy Brief, 2007-PB-09, August 2007.