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Why is the foreclosure rate so high in Indiana?

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  • Tatom, John

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.

Suggested Citation

  • Tatom, John, 2007. "Why is the foreclosure rate so high in Indiana?," MPRA Paper 4674, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:4674
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    File URL: https://mpra.ub.uni-muenchen.de/4674/1/MPRA_paper_4674.pdf
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    References listed on IDEAS

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    1. John C. Weicher, 2007. "The Long and Short of Housing: The Home Ownership Boom and the Subprime Foreclosure Bust," NFI Policy Briefs 2007-PB-09, Indiana State University, Scott College of Business, Networks Financial Institute.
    2. Shirley Chiu, 2006. "Nontraditional mortgages: appealing but misunderstood," Profitwise, Federal Reserve Bank of Chicago, issue Dec.
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    Cited by:

    1. Michael Berry & Nosheen Hemani & Michael van Zalingen, 2007. "Neighborhood housing dervices of Chicago and the home ownership preservation Initiative – a successful partnership looks to expand its scope and impact," Profitwise, Federal Reserve Bank of Chicago, issue Dec, pages 8-10.
    2. John A. Tatom, 2008. "The U.S. Foreclosure Crisis: A Two-Pronged Assault on the U.S. Economy," NFI Working Papers 2008-WP-10, Indiana State University, Scott College of Business, Networks Financial Institute.
    3. John Gilderbloom & Katrina Anaker & Gregory Squires & Matt Hanka & Joshua Ambrosius, 2011. "Why Foreclosure Rates in African American Neighborhoods are so High: Looking at the Real Reaonss," ERSA conference papers ersa11p1597, European Regional Science Association.
    4. Leslie McGranahan, 2007. "The determinants of state foreclosure rates: investigating the case of Indiana," Profitwise, Federal Reserve Bank of Chicago, issue Dec, pages 1-7.

    More about this item

    Keywords

    Foreclosure rate; mortgage finance; mortgage risk;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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