For Immediate Release

 

September 5, 2007

 

Contact:         Susan Miller

                      317-816-9760

                      smiller@hickmanassociates.com

 

 

The Nation’s Foreclosure Epidemic:

Causes, Consequences and Remedies

 

(September 4, 2007; Indianapolis, IN) –  Experts agree that the Midwest has particularly been impacted by the recent surge in home foreclosures, but they also believe the epidemic is curable.  On Tuesday, August 28, Networks Financial Institute at Indiana State University, in partnership with the Federal Reserve Bank of Chicago, convened The Nation’s Foreclosure Epidemic addressing the evolving foreclosure crisis.  Speakers and panelists representing financial institutions, the real estate community, builders, regulatory parties and government weighed in on the size and scope of the problem; the contributing factors; the impact on affected parties including homeowners, lending institutions, neighborhoods and families; and various regulatory and educational initiatives that may help remedy the foreclosure problem.

 

The Size and Scope of the Problem

Dr. Jack Tatom, Director of Research at Networks Financial Institute at Indiana State University, opened the session by examining the size of the foreclosure problem.  In 2006, the United States experienced a foreclosure rate of 1.1 %.  In Indiana, the foreclosure rate was 2.9 %, sandwiched between Ohio’s first place and Michigan’s third place foreclosure rates.  Dr. Tatom noted that while home ownership rates in each of these states was higher than the national average (with Indiana at a 74.2 % home ownership rate compared with a U.S. average of 68.8 %),  these states had significantly lower home price appreciation.  In Indiana, prices appreciated 3.2 % in 2006, compared to a 9.3 % appreciation rate throughout the U.S.  Employment growth, while positive, was also significantly slower in Indiana compared to the national average.

 

Dr. Tatom noted that rising foreclosures portend risks for local housing markets, lending institutions and the overall economy.  While the losses to lenders are not sizeable enough to tax the financial sectors, the corresponding loss of equity values will place a tremendous burden on the building sector, neighborhoods and individual homeowners.

 

The Housing Boom and the Subprime Foreclosure Bust

The subprime mortgage market has experienced vigorous growth, growing from a scant $3 billion of the market in 1988 to 15 % of the 2006 mortgage market.  The dollars amounts are significant — subprime loans rose from $38 billion in 1996 to $529 billion in 2004.  John C. Weicher, Director, Center for Housing and Financial Markets at the Hudson Institute discussed this surge in the subprime market and elaborated on the key causes.

 

Anticipating the future of the foreclosure trend, Weicher referenced the Mortgage Bankers Association data indicating a projected 2007 subprime ARM default rate of 10.8% or about 200,000 to 300,000 defaults.  He also provided data from the Center for Responsible Lending that projects over the life of the loan, a default rate of 15-20 % for subprime loans.

 

Weicher shared thoughts on how the foreclosure crisis may be brought under control.  He identified forbearance as a key remedy.  By working out a plan, Weicher advised that borrowers could mitigate losses and retain their homes. Weicher cited the media as a culprit in creating the concept of a “housing bubble” that preceded an actual crisis, noting that the current housing situation is not a repeat of the NASDAQ bubble.  He cited the housing market’s current trend toward slow but continued price growth.  House prices grew 4 % on average in 2006 and have not seen a downward turn since 1993.  “The FDIC defines a housing bubble as a 25 % increase over an eight year period followed by a 10 % decrease over a five year period,” he noted.  While the current Indiana market does not fit that description, Weicher identified some potential housing bubble markets. 

 

Weicher stated that, in Indiana, the cities of Anderson and Michigan City appear to be on the cusp of meeting the definition of a housing bubble.  Kokomo reported the largest drop in the nation in terms of home resale value, down 5.3% in 2006.  Indiana, Ohio and Michigan rank among the top six states for mortgage loan delinquencies, the top three for home foreclosure starts and the top three for homes in foreclosure. 

 

However, Weicher cautioned that home buyers and financial institutions must not lose sight of the broader view of the U.S. housing sector.  Between 1994 and 2004, home ownership rose from 64 to 69 %.  “The period ranks as the fastest increase in home ownership since the decade after World War II,” he noted.  Home ownership remains vigorous even among immigrant populations.  Weicher emphasized that the rise in subprime foreclosures is real, but, the problem will largely be limited to subprime loans.  “The roof is not caving in on the housing market,” Weicher concluded.

 

Yuliya Demyanyk, an economist with the Federal Reserve Bank of Saint Louis, provided preliminary insights from her ongoing research on the course of mortgage delinquencies.  Based on her analysis, “the relationship between low price appreciation after purchase and delinquency is the universal recipe.  Other factors may be important, but this is where we saw a real impact in foreclosure rates escalating,” Dr. Demyanyk noted.

 

The Impact of Foreclosures on Indiana’s Builders, Homeowners and Neighborhoods

The housing foreclosure crisis has impacted mortgage lenders and other financial institutions, but its effects are also being felt in neighborhoods, the real estate sector and whole communities.  A series of speakers shared their perspectives on how the foreclosure problem impacts this larger circle of stakeholders. 

 

Rick Wajda, Chief Executive Officer of the Indiana Builders Association believes the foreclosure process can be mitigated through effective regulation and education for both consumers and lenders.  He pointed to the 2007 Mortgage Foreclosure Counseling Bill as a step in the right direction.  Wajda further pointed to a need for Indiana to continue attracting jobs and for first-time homebuyers to invest in their own research on housing decision.  “The media has perhaps done too good of a job of scaring away qualified buyers.  Our challenge is to educate buyers about the responsibilities involved in owning a home without scaring them away from entering the market,” he noted.

 

Richard Brown, Chief Economist with the Federal Deposit Insurance Corporation (FDIC) weighed in on the causes of the foreclosure spike, “in a world with an appetite for growth and a tolerance for risk, the market was an engine for subprime growth.”  Despite the surge in foreclosures, Dr. Brown stated that in a $12 trillion banking industry, the problem is solvable.  He cited weak data and low documentation required for subprime loans as a key factor driving subprime foreclosures.  “The subprime collapse is an example of a failed business model, not a bad economy,” he noted.

 

Seth Payton, a senior policy analyst with Indiana University-Purdue University  Indianapolis’s Center for Urban Policy and the Environment reviewed a study he conducted for the Metropolitan Indianapolis Board of Realtors, looking at a 12-county foreclosure analysis.  He found that foreclosures often occur in concentrated areas characterized by low income and in households where 30 % or more of income is dedicated to mortgage costs.  Reviewing MIBOR data, he noted that the lower price points - $80,000 to $120,000  - represent the properties with the slowest appreciation rates.  Geography further puts the size of the problem in context.  Mr. Petyon noted that within a one-mile radius of a property in Marion County, an average of 51 foreclosed properties can be located.  This is especially significant when one considers that 33 % of a home’s value is impacted by what happens to the adjacent property. 

 

Steve Sullivan, Chief Executive Officer of MIBOR, reported that 20% of properties sold in July 2007 were foreclosed properties.  In Kokomo, 40 % of real estate inventory represented foreclosed properties, an increase of 19 % since 2005 and a 27 % surge since November 2007.  Mr. Sullivan noted that prior to 2000, Indiana did not deviate much from the U.S. average in terms of home appreciation. 

 

The Human Cost of Foreclosure

Moira Carlstedt, President of the Indianapolis Neighborhood Housing Partnership (INHP), spoke about the effects of foreclosure on actual and potential homeowners.  She discussed the stages families go through in avoiding and denying the problem.  Ultimately, Ms. Carlstedt concluded society will need to ask, “Do we invest in preservation or move toward a revitalization strategy?” She concluded that families need to be educated about the organizations that exist to support them before foreclosure commences.

 

Six % of Indiana Foreclosures are Directly Related to Fraud

Indiana Secretary of State Todd Rokita served as luncheon keynote speaker and addressed some of the initiatives his office has implemented to halt fraudulent mortgage brokers.  In 2005, Secretary Rokita introduced Indiana Investment Watch to educate Indiana investors and monitor investment providers, including mortgage brokers. The $1.8 million program is funded through fees assessed to abusive brokers, appraisers, title companies and related real estate partners.   Secretary Rokita decried the lack of a single database in Indiana to verify home appraisal values and characterized Indiana’s foreclosure problem as a “perfect storm,” with property taxes being a complicating issue.  He advocated a two-pronged approach that focuses on enforcing regulation and educating consumers, starting in Indiana’s schools. 

 

Remedies and Solutions – How Indiana Is Fighting Back

A panel, moderated by Curt Wiley, who co-chairs the Indianapolis area Mortgage Fraud and Foreclosure Prevention Task Force, noted that Indianapolis non-profit Momentive established a help line in 2004 to deal with the mortgage foreclosure problem.  In 2007, calls are projected to reach 7,500.  Momentive partners with 25 agencies to provide loss mitigation counseling to consumers in both the pre- and post-purchase phase of home buying.  “There is an appetite for resources.  As a society we must help individuals move beyond embarrassment so that they may mitigate their situation sooner rather than later,” he noted.

 

Bonnie Boards, Vice President and Homeownership Preservation Officer for Chase Bank, discussed the bank’s Homeownership Preservation Program.  The service includes a help line exclusively for non-profit counseling agencies, as well as fax and e-mail support.  Four case managers support the service, including a bilingual staff person.  The Homeownership Preservation Office supports an average of 130 to 150 new cases per month. 

 

Donna Eide, co-chair of the Mortgage Fraud and Foreclosure Prevention Task Force and formerly Assistant United States Attorney for the Southern District of Indiana, spoke about her experiences prosecuting mortgage fraud cases.  Ms. Eide cited the lack of federal oversight as a key reason for the surge in fraud.  She shared recommendations that her organization is proposing to the State Attorney General, including a requirement for criminal background checks for mortgage brokers, enhanced sharing of information across agencies, reporting of a home’s sale price on the deed, registration and license numbers on the property deed and reporting any claim for exemption on the deed.  “Putting the mortgage information on a public document is a good way of making it easier to identify fraud,” Ms. Eide noted.

 

Desiree Hatcher, Community Affairs Program Director with the Federal Reserve Bank of Chicago, discussed the Federal Reserve Bank’s efforts to encourage responsible underwriting through guidance recently issued for banks.  She urged financial institutions to verify documentation, qualify borrowers at the fully indexed rate (never the teaser rate), and educate the borrower so that he/she understands the terms.  She also advised banks to incorporate home ownership counseling as part of their overall Community Investment Act compliance.  “The cost for a financial institution to complete a foreclosure is $50,000.  Educating customers is a much more cost-effective opportunity,” Ms. Hatcher noted.

 

All Agree Financial Education at the Heart of the Solution

David Godsted, NFI’s Director of Financial Literacy, released Networks Financial Institute’s National Adult Financial Literacy Research, a nationwide survey of adults to understand their attitudes, personal confidence and propensity to seek information.  The results point to a clear lack of financial education and awareness.  While adults say that financial literacy is important and that they need to know more, for a number of reasons few are investing the time and engaging the resources to improve their financial literacy.  The full report, as well as presentations and slides from other Financial Forum experts, may be accessed online at www.isunetworks.org.

 

About Networks Financial Institute

Networks Financial Institute at Indiana State University was founded in 2003 with a grant from Lilly Endowment, Inc. The non-profit organization strives to facilitate a more effective national and international financial services marketplace through education, outreach and research. Networks Financial Institute is headquartered in Indianapolis with offices on the campus of Indiana State University in Terre Haute and outreach in Washington, D.C., and internationally.  For more information about Networks Financial Institute, visit www.networksfinancialinstitute.org.