Why is the foreclosure rate so high in Indiana?

John Tatom

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Foreclosure rate; mortgage finance; mortgage risk (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2007-08-28
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (5)

Published in Networks Financial Institute Report (2007): pp. 1-19

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Working Paper: Why Is the Foreclosure Rate So High in Indiana? (2007)
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