Indiana’s Foreclosure Rate and What to Do About It

September 10, 2007

Indiana Writers Group column
For release Sept. 12 and thereafter
667 words (with optional cut)

Color digital mug shot available on request

By John Tatom

It is true that Indiana is among those states that has had a major foreclosure problem. And it is true that the Indiana foreclosure rate is likely to climb to historical levels in association with a national explosion several years ago of subprime loans.

It is not true, however, that the average Hoosier homeowner is doomed.

Indiana has been a leader in foreclosures since early in 2001. In part, the high share of risky borrowers has been fostered by ample supply of affordable housing that encouraged marginal borrowers to take on cheap loans that could not be paid. The state was one that experienced unusually high FHA and subprime borrowing. And disproportionate numbers of subprime borrowers (with already high rates) took out adjustable rate loans here and around the nation. They are the ones who will be most likely to be unable to afford their payments and end in foreclosure.

The solution, therefore, is individual rather than governmental: These stressed borrowers should refinance now at a fixed rate if they can. Otherwise, they should start thinking about the least costly exit strategy.

In regard to economic prospects, the situation in surrounding states is more serious. In Michigan, the foreclosure rate has risen more recently and is more closely related to poor economic performance, especially in the past three years or so in the auto industry. Ohio has led the nation in foreclosure since 2003. There, a weak economy, especially slow growth of employment and a higher unemployment rate, has played important roles.  

In all of the high-foreclosure states an important factor has been recent innovations in housing markets making loans to subprime borrowers more readily available. Also important has been a slow pace of house price appreciation or decline that failed to bail out problem borrowers and rising adjustable rates on adjustable rate loans.

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Traditionally, borrowers with relatively low income relative to the cost of housing and low credit ratings, because of past problems of loan repayment or simply lack of evidence of ability and a willingness to pay, would access the FHA market. These borrowers had much higher loan default or delinquency rates and therefore a higher percentage of such loans ended in foreclosure for any given economic and housing market conditions.  
For the past four years or so, borrowers with even lower credit scores than FHA borrowers could readily find credit in markets for high-risk creditors like themselves. These include those whose economic circumstances make them less likely to be able to make their loan payments and meet other essential home ownership costs (insurance and property taxes) and/or whose past behavior may indicate a lower disposition to pay their monthly bills for their housing and other necessities.
These credits carry higher interest rates, which lenders hoped would deter borrowing by individuals unlikely to repay their debts and that will cover the higher costs of those who in fact do not repay loans.

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As the chairman of the Federal Reserve has noted, there are nearly 7.5 million home owners because of the rise of subprime borrowing over the past 15 years or so, accounting for about 14 percent of all mortgages outstanding. Another 10 percent of all mortgages are referred to as near prime; that is, they have higher expected foreclosure rates than other prime loans.  

In total, these loans represent about 24 percent of all mortgages outstanding and over 12 million loans and homeowners. More importantly, most of the growth in this category has come in the past four years. If continued, these shares and loans would take on even larger shares of the market.

The share of subprime loans, then, is likely to replace the FHA share as a better indicator of foreclosure in housing markets. There is limited experience with such loans, however, especially on such a large scale. Estimates for Indiana or any specific state may lack precision for years to come.

John A. Tatom, Ph.D., director of research at Networks Financial Institute and associate professor of finance at Indiana State University, is an adjunct scholar of the Indiana Policy Review Foundation. He has published widely on international and domestic monetary and fiscal policy issues, especially inflation, capital formation, productivity and growth. Contact him at


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