THE DYNAMIC INTERACTION BETWEEN RESIDENTIAL MORTGAGE FORECLOSURE, NEIGHBORHOOD CHARACTERISTICS, AND NEIGHBORHOOD CHANGE

DISSERTATION

Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University

By Yanmei Li, M.A. *****

The Ohio State University 2006

Dissertation Committee: Professor Hazel Morrow-Jones, Adviser Professor Donald R. Haurin Professor Philip A. Viton

Approved by

Adviser Graduate Program in City and Regional Planning

Copyright by Yanmei Li 2006

ABSTRACT

Many factors lead to mortgage default and foreclosure, and neighborhood characteristics are among the most important (Quercia and Stegman, 1992). However, few scholars have examined how neighborhood characteristics contribute to mortgage foreclosure (Cotterman, 2001; Baxter and Lauria, 2000; Lauria, 1998) and none of the previous studies have systematically addressed the mutual interaction between foreclosure and neighborhood characteristics and change. This research uses multiple datasets from Ohios two most populous counties to examine some of these previously omitted or understudied aspects of the issue. Particular attention has been paid to each neighborhoods racial composition, economic level, housing prices and other housing stock characteristics as well as to the changes over time in those variables. The analysis starts with simple descriptive statistics, spatial autocorrelation analysis, and comparison of different foreclosure patterns in the two counties. Then spatial

regression models, H-Robust models and Iterated Seemingly Unrelated Regression (ITSUR) are used to explain the interaction between mortgage foreclosure and neighborhood characteristics and change. The study finds that foreclosures cluster in lowincome minority neighborhoods and inner cities, although suburban areas have seen an increase. Educational attainment, median household income, and average housing cost burden contribute to foreclosures in both counties. As expected there are similarities and ii

disparities in the interaction of foreclosure and neighborhoods between the two counties. The use of panel data, Robust OLS, spatial lag models and SUR has solved some problems related to spatial dependence, heteroskedasticity and mutual non-recursive interaction between foreclosure and neighborhoods. The research not only contributes to the literate and methodology in related topics, but also contributes to our understanding of the relationship between foreclosure and neighborhoods, and will assist in the creation of better policies to deal with the issue of foreclosure. The policy recommendations include a strong focus on neighborhood

foreclosure prevention, not just policies aimed at individual homeowners. These policies might focus on neighborhoods with low educational attainment, an increasing percentage black population, or a high female headship rate. This project suggests that foreclosure prevention programs not be the same in all places.

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Dedicated to my father and mother

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ACKNOWLEDGMENTS

I wish to thank my adviser, Professor Hazel Morrow-Jones, for her intellectual support, encouragement, and enthusiasm that made this dissertation possible, and for her patience in correcting my English, stylistic and scientific errors. I thank Professor Jean M. Guldmann, Professor Phillip Viton, and Professor Donald Haurin for their guidance which made the methodology more appealing. I am grateful to Charlie Post from the Housing Research Center at Cleveland State University to provide Cuyahoga Countys parcel data. I wish to thank Katrin Anacker and Fang-Chi Hsu for their continuous encouragement. I am indebted to Joe Gakenheimer for his support and suggestions in writing and preparing this manuscript. I thank Eileen Frey, Cheryl Kaufman, and Donna Fasnacht for their continuous prayers and love. This research was supported by a grant from the Center for Urban and Regional Analysis (CURA) at the Ohio State University. The financial support from the grant has made this dissertation possible.

VITA

December 25, 1975 .......Born - Qujing, China 1998 ...B.S. Geography, East China Normal University, Shanghai, China 2001 M.A. Regional Economics, Beijing Normal University, Beijing, China 2001 present Graduate Research Associate, The Ohio State University

PUBLICATIONS 1. Wu, Dianting, Yanmei Li, et. al. 2002. The Development of Intellectual Economy in China. Economic Geography (Chinese). Vol. 22, No. 4 2. Wu, Dianting, Jie Tian, Yanmei Li, et. al. 2002. The Analysis of the Relationships between Modernization, Industrialization, Urbanization, Intellectualization and Economic Development in China. Systems Engineering Theory and Practice (Chinese). Vol.22. No. 11. 3. Li, Yanmei, Dianting Wu, and Gang Zeng, 1999. The Characteristics and Development Strategies of Hi-tech in Changjiang Delta, Areal Research and Development (Chinese), Vol.18, No.3 4. Wu, Dianting, Shen Ji, and Yanmei Li. 1998. Dividing One Integrated Part to Three Sections in Geographic Thoughts, Youth Geographer(Chinese), Vol.9, No.4

FIELDS OF STUDY Major Field: City and Regional Planning

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TABLE OF CONTENTS

ABSTRACT ............................................................................................................. ii ACKNOWLEDGMENTS ................................................................................................ v VITA ................................................................................................................ vi LIST OF TABLES ........................................................................................................... ix LIST OF FIGURES ......................................................................................................... xi CHAPTER 1 INTRODUCTION AND RESEARCH QUESTIONS......................... 1 Nature of the Problem..................................................................................................... 2 Objective of the Research ............................................................................................... 3 Research Questions......................................................................................................... 4 Scope of the Research..................................................................................................... 6 CHAPTER 2 LITERATURE REVIEW...................................................................... 8 Residential Mortgage Foreclosure .................................................................................. 8 The Interaction between Neighborhood Characteristics, Neighborhood Change and Residential Mortgage Foreclosure ................................................................................ 31 Major Problems in Neighborhood-Effects Research .................................................... 46 Literature Summary and the Derivation of Research Questions .................................. 50 CHAPTER 3 RESEARCH METHODOLOGY........................................................ 52 Hypotheses.................................................................................................................... 52 Major Datasets Used in Foreclosure Research ............................................................. 56 Summary of Datasets Used in this Research ................................................................ 62 Variable Selection and Description .............................................................................. 64 Research Methodology ................................................................................................. 73 CHAPTER 4 DESCRIPTIVE AND SPATIAL ANALYSIS .................................. 84 Judicial Foreclosure Process and Sheriffs Deed Transfer Data................................... 84 Ohios Foreclosure Situation ........................................................................................ 87 Research Area and Geographic Definition of Neighborhood....................................... 91 Data Description for Each County................................................................................ 99 Conclusions................................................................................................................. 139 CHAPTER 5 THE INTERACTION BETWEEN RESIDENTIAL MORTGAGE FORECLOSURE, NEIGHBORHOOD CHARACTERISTICS, AND NEIGHBORHOOD CHANGE .............................................. 141 Effects of Neighborhoods on Foreclosure .................................................................. 145 vii

Summary: Effects of Neighborhood Characteristics on Residential Mortgage Foreclosure.................................................................................................................. 167 The Impact of Residential Mortgage Foreclosure on Neighborhood Change: A Seemingly Unrelated Regression (SUR) Approach.................................................... 173 Conclusion: The Interaction between Residential Mortgage Foreclosure, Neighborhood Characteristics, and Neighborhood Change................................................................ 188 CHAPTER 6 CONCLUSIONS, POLICY IMPLICATIONS AND FUTURE RESEARCH DIRECTIONS ............................................................ 192

APPENDIX A FORECLOSURE PROCEDURES ................................................. 207 APPENDIX B TOTAL SHERIFFS DEEDS AT THE SCHOOL DISTRICT LEVEL IN FRANKLIN COUNTY................................................. 214 APPENDIX C SPATIAL AUTOCORRELATION OF SELECTED VARIABLES ............................................................................................................. 216 APPENDIX D SUR MODEL RESULTS ................................................................. 229 APPENDIX E THE GEOGRAPHIC DISTRIBUTION OF SELECTED NEIGHBORHOOD CHANGE INDICATORS AT THE BLOCK GROUP LEVEL IN FRANKLIN AND CUYAHOGA COUNTIES ............................................................................................................. 233 BIBLIOGRAPHY..239 NOTES .252

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LIST OF TABLES

Table 3.1: List of Selected Variables................................................................................ 70 Table 4.1: Number of New Foreclosures Filed in 2004 by County (descending by the number of filings) ..................................................................................................... 89 Table 4.2: Selected Characteristics of the Two Counties ................................................. 96 Table 4.3: New Foreclosure Filings, Terminated Foreclosure Cases and Sheriffs Deeds (19972004, Franklin County).................................................................................. 99 Table 4.4: The Total Single-family Sheriffs Deeds (19972004, Franklin County)..... 100 Table 4.5: Change in Neighborhood Variables from 1990 to 2000 by Groups of Foreclosure Rate in Franklin County...................................................................... 116 Table 4.6: Sheriffs Deeds as a Percentage of Total New Filings and Total Foreclosure Case Terminations in Cuyahoga County (19972004)........................................... 119 Table 4.7: Total Available Residential Sheriffs Deeds in Cuyahoga County (19972004) ................................................................................................................................. 120 Table 4.8: Change of Selected Neighborhood Variables by Groups of Foreclosure Rate in Cuyahoga County (19902000).............................................................................. 137 Table 5.1: Foreclosure Rate Characteristics for Franklin and Cuyahoga Counties........ 141 Table 5.2: Descriptive Analysis for Franklin County and Cuyahoga County ................ 143 Table 5.3: Comparison of OLS Regression and Spatial Regression of the Effect of Neighborhood Characteristics (2000) and Change on Foreclosure Rate in Franklin County (Dependent Variable: Foreclosure Rate).................................................... 150 Table 5.4: Comparison of OLS Regression and Spatial Regression of the Effect of Neighborhood Characteristics (2000) and Change on Foreclosure Rate in Cuyahoga County (Dependent Variable: Foreclosure Rate).................................................... 154 Table 5.5: Variables that are Significant in Each County.............................................. 169 ix

Table 5.6: Cross Model Covariance Matrix for Cuyahoga County ................................ 175 Table 5.7: ITSUR Estimate Results with FORECLOSURE (as an independent variable) Significant (System Weighted R-Square: 0.4104; System Weighted MSE: 1.0000) ................................................................................................................................. 177 Table A.1: Legislation Requirement of Mortgage Foreclosure in Different States in the U.S. ......................................................................................................................... 208 Table B.1: Total Sheriffs Deeds at the School District Level in Franklin County (19972004, Note: 11838 total cases and 6 cases cant be identified at the school district level) ....................................................................................................................... 215 Table D.1: ITSUR Estimate Results (where FORECLOSURE is not significant) ..... 230

LIST OF FIGURES

Figure 2.1: The Interaction between Residential Mortgage Foreclosure, and Neighborhood Characteristics and Change............................................................... 30 Figure 3.1: Spatial Regression Decision Process (Anselin, 2005: 217) ........................... 78 Figure 4.1: Judicial Foreclosure Process .......................................................................... 86 Figure 4.2: New Foreclosure Filings in Ohio (19902005).............................................. 87 Figure 4.3: Change of Foreclosures Started in Ohio (19842003)................................... 89 Figure 4.4: Average Annual Growth Rate of New foreclosure Filings by County .......... 90 Figure 4.5 New Foreclosure Filings in Cuyahoga County and Franklin County (1990 2004) ................................................................................................................................. 92 Figure 4.6: Research Area: Cuyahoga County and Franklin County, Ohio ..................... 95 Figure 4.7: Franklin County Foreclosure Rate Distribution at the Block Group Level (19972004)............................................................................................................ 101 Figure 4.8: Spatial Distribution of Sheriffs Deeds in Franklin County (19972004) ... 103 Figure 4.9: Total Residential Sheriffs Deeds in Franklin County (19972004) ........... 105 Figure 4.10: Comparison between the 1997 and 2004 of the Distribution of Sheriffs Deeds in Franklin County ....................................................................................... 106 Figure 4.11: Foreclosure Rates by Block Groups in Franklin County (19972004)...... 107 Figure 4.12: Connectivity of Block Groups in Franklin County .................................... 109 Figure 4.13: Map of Foreclosure Rate Local Spatial Autocorrelation in Franklin County (19972004)............................................................................................................ 113 Figure 4.14: Total Sheriffs Deeds in Cuyahoga County (19652004).......................... 118 xi

Figure 4.15: Cuyahoga County Foreclosure Rate Distribution at the Block Group Level (19972004)............................................................................................................ 121 Figure 4.16: Spatial Distribution of Sheriffs Deeds in Cuyahoga County (19972004) ................................................................................................................................. 122 Figure 4.17: Total Residential Sheriffs Deeds in Cuyahoga County (19972004)....... 124 Figure 4.18: Comparison between the 1997 and 2004 Distribution of Sheriffs Deed Transfer in Cuyahoga County................................................................................. 125 Figure 4.19: Foreclosure Rates by Block Groups in Cuyahoga County (19972004) ... 126 Figure 4.20: Foreclosure Rates by Block Groups in Cuyahoga County (1983-1989).... 128 Figure 4.21: Connectivity of Block Groups in Cuyahoga County.................................. 130 Figure 4.22: Map of Foreclosure Rate Local Spatial Autocorrelation in Cuyahoga County (19972004)............................................................................................................ 134 Figure 5.1: Summary of the Interaction between Residential Mortgage Foreclosure and Neighborhood Characteristics and Change............................................................. 191 Figure 6.1: Change in Female Headship Rate in Cuyahoga County (19902000, % points) ................................................................................................................................. 201 Figure 6.2: Change in Percentage Population below the Poverty Line in Cuyahoga County (% points) ................................................................................................... 202 Figure C.1: The Local Spatial Autocorrelation between Female Headship Rate in 2000 and Foreclosure Rate (20012004) in Franklin County ......................................... 217 Figure C.2: The Local Autocorrelation between Median Household Income in 2000 and Foreclosure Rate (20012004) in Franklin County ................................................ 218 Figure C.3: The Local Autocorrelation between Housing Cost Burden with a Mortgage in 2000 and Foreclosure Rate (20012004) in Franklin County ................................ 219 Figure C.4: The Local Autocorrelation between Median Housing Value of OwnerOccupied Housing Units in 2000 and Foreclosure Rate (20012004) in Franklin County..................................................................................................................... 220 Figure C.5: The Local Autocorrelation between Housing Vacancy Rate in 2000 and Foreclosure Rate (20012004) in Franklin County ................................................ 221

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Figure C.6: The Local Autocorrelation between Homeownership Rate in 2000 and Foreclosure Rate (20012004) in Franklin County ................................................ 222 Figure C.7: The Local Spatial Autocorrelation between Female Headship Rate in 2000 and Foreclosure Rate (20012004) in Cuyahoga County....................................... 223 Figure C.8: The Local Autocorrelation between Median Household Income in 2000 and Foreclosure Rate (20012004) in Cuyahoga County.............................................. 224 Figure C.9: The Local Autocorrelation between Housing Cost Burden with a Mortgage in 2000 and Foreclosure Rate (20012004) in Cuyahoga County.............................. 225 Figure C.10: The Local Autocorrelation between Median Housing Value of OwnerOccupied Housing Units in 2000 and Foreclosure Rate (20012004) in Cuyahoga County..................................................................................................................... 226 Figure C.11: The Local Autocorrelation between Housing Vacancy Rate in 2000 and Foreclosure Rate (20012004) in Cuyahoga County.............................................. 227 Figure C.12: The Local Autocorrelation between Homeownership Rate in 2000 and Foreclosure Rate (20012004) in Cuyahoga County.............................................. 228 Figure E.1: Change in % Divorced Population in Cuyahoga County (19902000, % points) ..................................................................................................................... 234 Figure E.2: Change in % Population with College degrees or Higher in Cuyahoga County (19902000, % points)............................................................................................ 235 Figure E.3: Change in Homeownership Rate in Cuyahoga County (19902000, % points) ................................................................................................................................. 236 Figure E.4: Change in Housing Vacancy Rate in Cuyahoga County (19902000, % points) ..................................................................................................................... 237 Figure E.5: Change in Median Housing Value in Cuyahoga County (19902000, % points) ..................................................................................................................... 238

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CHAPTER 1

INTRODUCTION AND RESEARCH QUESTIONS

Residential mortgage foreclosures are the processes that homeowners are legally forced to foreclose on their properties because they default on their mortgage payment. There are many factors contributing to foreclosures. Foreclosures have profound impacts on individual homeowners, neighborhoods, mortgage lenders, and policies. As the first step of a research agenda this project focuses on the interaction between residential mortgage foreclosures, neighborhood characteristics, and neighborhood change. Residential mortgage default and foreclosure issues did not attract much attention until the mid 1970s, when the single-family foreclosure rate in the U.S. began to increase. Most of the studies since then focused on the factors contributing to mortgage default and foreclosure, with an emphasis on what financial institutions could do better to manage their credit risk (Quercia and Stegman, 1992). Since 2000, there has been a dramatic rise in foreclosure rates, especially in Ohio and Indiana, and it has caused great concern among policy makers, citizen advocacy groups, fair housing agencies, and other concerned individuals. This means that many more stakeholders are showing an interest in mortgage default and foreclosure. The complexity of this issue has increased with the advent of flexible financial products, along with increasing ethical and legal challenges

facing the real estate profession (such as mortgage fraud, incomplete disclosure of costs associated with mortgages, using a teaser rate to confuse loan borrowers, etc.).

Nature of the Problem

There is abundant literature on factors contributing to mortgage default and foreclosure. Many of the previous studies focused on measuring default risk using various factors and models, in order to provide more accurate mortgage pricing and risk management for financial institutions. Neighborhood characteristics are one of the important sets of factors that should be considered in these models of residential mortgage foreclosure. But only a few scholars have paid attention to the impact of neighborhood characteristics on residential mortgage foreclosure (Cotterman, 2001; von Furstenburg and Green, 1974; Williams et. al., 1974; Sandor and Sosin, 1975). Residential mortgage foreclosure is an issue in housing markets, and housing markets are geographically bounded. So mortgage foreclosure, neighborhood characteristics and neighborhood change are related to each other in complex ways. But, just as with the studies of neighborhood effects on mortgage default and foreclosure, the impacts of foreclosure on neighborhood characteristics and change have not been fully explored, with the notable exception of the studies conducted by Lauria and Baxter in New Orleans (Lauria, 1998; Lauria and Baxter, 1999; Baxter and Lauria, 2000), and Immergluck and Smith in Chicago (Immergluck and Smith, 2005a, 2005b). The interaction between mortgage foreclosure and neighborhood change is very complicated and is related to many different aspects of housing market equilibrium, economic development, lender and borrower decision theory and social transition, among 2

other things. In order to examine the interactive relationships between residential mortgage foreclosure and neighborhood characteristics and change, this study uses Sheriffs foreclosure sales data in the two most populous counties in Ohio, Cuyahoga County and Franklin County, the central counties of the Cleveland and Columbus metropolitan areas, respectively. Ohio has one of the highest residential mortgage foreclosure rates in the United States, where the foreclosure rate is defined as the number of mortgages in foreclosure as a percentage of all mortgage loans outstanding (Krumkin, 2000). There has been a tremendous increase in foreclosures in Ohio since 1995. These two Ohio counties provide good case studies for testing hypotheses about the interaction between mortgage foreclosure and neighborhood characteristics and change. The Sheriffs Sales data are combined with other datasets, such as census demographic data, housing and economic data, and real property parcel data in each county, to develop a deeper understanding of the complexities than has been previously available (Cotterman, 2001; Baxter and Lauria, 2000).

Objective of the Research

The objective of this research is to improve our understanding of the complex relationship between neighborhood characteristics, foreclosure and neighborhood change. In addition, I hope to make a significant contribution to housing and foreclosure policy in Ohio. The findings will contribute to both theory and policy on foreclosure and neighborhood change. The research results will also help target community-based

foreclosure prevention programs to the most at-risk neighborhoods. The document 3

includes suggestions for ways to intervene to reduce foreclosure concentration and the impacts of such concentration on neighborhoods. The research will contribute to the limited academic literature on this topic by adding significant work over time and across space, allowing an analysis of the context within which foreclosure occurs. The explicit consideration of racial issues and the problem of house price depreciation incorporated in this analysis will also enhance the existing models.

Research Questions
There are three primary questions that the research tries to answer. Following each question are more detailed hypotheses. 1. Do neighborhood characteristics and changes affect residential mortgage default and foreclosure? If so, how? If the answer to this question is yes, several subsidiary questions need to be addressed. For example, what neighborhood factors contribute to mortgage default risk and rising mortgage foreclosure rates? What kinds of neighborhoods have seen the highest increase in foreclosure sales? Why do different neighborhoods have different foreclosure rates? Do the phenomena follow certain patterns over time in different metropolitan areas?

2. Do mortgage foreclosures affect neighborhoods? How and under what circumstances? According to previous research, mainly by Lauria and Baxter (1998, 1999, 2000), the impact of mortgage foreclosure on neighborhoods in which foreclosed properties are

located is very significant. They found important impacts on racial transition and general economic condition of the neighborhoods. Properties in some neighborhoods tend to have a lower price appreciation (Oliver and Shapiro, 1995; Raffalovich, 2002; Shapiro, 2004), which in turn makes it more likely that people will default on mortgages because a lower appreciation rate or depreciation will decrease the propertys real value, and that leads to less equity. If values depreciate enough, the property could end up with negative equity. Negative equity is one of the leading reasons for people to default on mortgage payments (Case and Shiller, 1996; Cunningham and Capone, 1990). Higher foreclosure rates in a neighborhood can decrease housing values in the neighborhood and make price appreciation even lower, thus making more people likely to default. On the other hand, the characteristics of the residents of these neighborhoods must also be taken into account as those characteristics could tend to lead to higher default rates. Thus, the complexity of the geographic relationships, as well as the interdependencies of the people and the neighborhoods, requires special attention. In this research, in addition to the racial composition and general economic condition of neighborhoods, housing price appreciation and other housing stock characteristics of neighborhoods are explored to find out whether and how mortgage foreclosure affects housing price appreciation and neighborhood stability.

3. Can we model the cyclical nature of the relationship between neighborhood characteristics, neighborhood change and foreclosure rates? The first two research questions indicate that separating the impact of neighborhoods on foreclosures from the impact of foreclosures on neighborhoods is a 5

crucial methodological problem.

Thus, in order to address these two substantive

questions, the research must address the methodological question that is relevant to many neighborhood-effects studies. Neighborhood-effects research is a controversial area of inquiry in social sciences (Dietz, 2002), although there is abundant literature addressing research methods in the area. There are several difficult problems in this area of research, including endogenous effects, omitted variables, and reflection problems (Dietz, 2002; Manski, 2001). My research develops a model to deal with the nonrecursive nature of the relationship between neighborhood characteristics, neighborhood change and foreclosure rates, taking into account the possibility of endogenous effects, omitted independent variables and the reflection problem (Dietz, 2002).

Scope of the Research

The major datasets used for this research are the Sheriffs deed transfer data from 1997 to 2004 (in Cuyahoga County the data from 1983 to 1989 are also used), the census block group data from 1990 and 2000, the census designated place data from 1990 and 2000, and real property parcel data from 2004 and 2005. These datasets were merged for analysis purposes. More details in the data sets and the methodologies are included in the relevant chapters. The second chapter of this dissertation provides the literature review and conceptual models. Then I turn to the results. The first section of results provides the descriptive and spatial analyses of the foreclosure patterns in each county, and their relationships with selected neighborhood characteristics.

The second results section reports the outcomes of the advanced spatial analysis and the spatial modeling. Spatial autocorrelation analysis measures how spatial

autocorrelation affects the regression results and how the spatial lag and error models differ from the Ordinary Least Square (OLS) regression models when using neighborhood variables to predict foreclosure rate. The third section of the results formulates a Seemingly Unrelated Regression (SUR) system to measure how foreclosure rates and other neighborhood and place-characteristic variables affect each selected neighborhood change variable in each county. In the final chapter of the dissertation, the major findings from the research will be used as the basis for policy suggestions to help policy makers be aware of the spatial patterns of foreclosure, the mutual impact of neighborhood variables and foreclosure, and the specific neighborhood factors that are highly related to foreclosure. Targeted policies can be created to manage neighborhood variables identified in this research in order to break the cyclic nature of the relationship between neighborhood characteristics and foreclosure. The establishment of spatial analysis and models and SUR models in the research will provide an effective method for analyzing similar research questions, and the combination of these spatial and quantitative models will contribute to foreclosure research.

CHAPTER 2

LITERATURE REVIEW

Residential Mortgage Foreclosure

Concepts of Mortgage Delinquency, Mortgage Default and Foreclosure Mortgage foreclosure is the process by which the mortgage originators claim legal rights to the property by foreclosing the mortgage in the event of mortgage default (Frumkin, 2000). A mortgage delinquency, which usually means a mortgage repayment is overdue 30 days or more, becomes a mortgage default when it is overdue by more than 90 days. When the mortgage is in default, the lender may choose to work with the borrower to see if the loan can be modified or brought back to a normal balance. When these efforts fail, the lender will usually file a foreclosure with the court to claim its legal rights under the mortgage. Many studies treat default and foreclosure as synonymous (Goering and Wienk, 1996), but in fact, default is incurred and affected by borrowers choices, while foreclosure is one of the options available to lenders to enforce the repayment of a mortgage in default. This research will treat default and foreclosure as two related but different processes. A civic real estate sale is the final procedure in a judicial foreclosure process. The property can be withdrawn from this process if the borrower(s) file for bankruptcy, bring

the back payments up to date, sell the property, legally cancel the mortgage, or resume the mortgage repayments. In contemporary U.S. society, with its mature financial markets and innovative and flexible financial products, buying a home has become much easier. Homebuyers do not need to accumulate large amounts of savings in order to purchase a house. When certain conditions are met, they can readily obtain a mortgage to finance a home purchase, although different financial agencies might have different underwriting standards. When a borrower obtains a mortgage to buy a house, a scheduled repayment of the mortgage is incurred. This schedule is determined by the loan-to-value ratio, loan term, mortgage interest rate, and interest compounding factors. But the mortgage performances of borrowers differ greatly and are related to the differences in household characteristics, such as income, family structure, and mobility decisions, and to the general economic context, including recessions, interest rates and so forth. Mortgage performance includes timely submission of mortgage payments, prepayment behavior, refinancing behavior, mortgage delinquency and mortgage default. Of these behaviors only mortgage delinquency and default are related to a possible change of homeownership status of borrowers and the risk of borrowers losing their homes if they are not able to resume the mortgage repayment. Mortgage delinquency usually means missing one scheduled payment. At that time, lenders cannot tell whether the payment will be continued or stopped in the next payment cycle. But if several payments are missed, usually three (Quercia and Stegman, 1992), lenders will consider borrowers to have defaulted. The criteria that determine a default vary among financial institutions. When a loan defaults, lenders will choose either to use 9

loss-mitigation techniques to work with the borrowers to resolve the issue and resume the payments, or foreclose the mortgage by auctioning the mortgage property to cover the loan balances of the borrowers (Capone Jr., et. al., 1996). Lenders choose the option that costs the least to process. If the costs of working out the troubled loan are much larger than foreclosure costs, lenders prefer to choose foreclosure. On the other hand, many lenders are willing to work with borrowers first to find ways to resolve the issue. If this cooperation fails, a foreclosure action will be filed in the local civic court or a nonjudicial trustees sales process will be initiated. A civic real estate sale is the final procedure in a judicial foreclosure process. The decision of whether to choose foreclosure depends greatly on state legislation (Clauretie, 1987). In a non-judicial process, when loans are in default a notice of default will be issued to the borrower. Then, if the borrower cannot repay the back payments, a trustees sale will be initiated to sell the foreclosed properties. Thus a non-judicial foreclosure does not need the involvement of courts and Sheriffs Offices. But the judicial process starts with foreclosure filings to the local court. Then, if the borrower cannot walk out of the foreclosure process (e.g. cannot sell the property before the auction, or get a bankruptcy), the court will order a Sheriffs sale. Both judicial and nonjudicial processes have advantages and disadvantages. The biggest advantage of the judicial process is the legal guarantee that helps the involved parties avoid disputes in titles and other real estate claims. However, judicial foreclosure is much more expensive in terms of legal fees and is more time consuming than non-judicial processes. Many states in the U.S. allow both judicial and non-judicial processes, but Ohio only allows a judicial process (see Appendix A for a detailed description of the process). 10

According to research conducted by Clauretie (1987), states without judicial foreclosure usually see a higher foreclosure rate because of the low foreclosure costs, controlling the time span of the foreclosure process. This makes Ohios high foreclosure rate even more surprising.

Previous Research on Mortgage Default and Foreclosure Studies on residential mortgage default have changed over time. Many have focused on lenders and financial institutions need to understand the mechanisms in mortgage default. Using these studies, financial institutions have sought to minimize mortgage default risk and losses associated with the risk. Only in recent years has research on the social impacts of mortgage default and foreclosure begun to appear in the academic literature. But the recent research still has not resolved some essential issues related to foreclosure, such as whether there are racial differences in mortgage default decisions, how and where the households move after they lose their homes due to the foreclosure process, and how those changes affect the structure of a neighborhood.

Three Generations Research on Mortgage Default In the early 1990s, Quercia and Stegman (1992) summarized the literature on residential mortgage default. They provided a comprehensive analysis of mortgage default risk from three different perspectives, that of lenders, borrowers, and institutions, each of which is associated with a research generation. These perspectives have contributed to the mortgage default literature either theoretically or empirically. Their research also tried to seek different indicators to measure mortgage default risk, such as 11

default rates, expected mortgage losses, and interest rate premiums (Quercia and Stegman, 1992). The first generations studies were from the lenders perspective. Minimizing credit risk is one of the essential activities in the daily management of financial institutions (Saunders and Cornett, 2003). The goal of lenders facing mortgage default by borrowers is to lower the costs associated with defaults and foreclosures. This stream of research found that mortgage default rates are correlated with loan characteristics, borrower characteristics and property characteristics. For example, loans with higher loan-to-value ratios, higher interest rates and longer terms are much more likely to be in default compared to the reverse characteristics of those indicators. Higher initial payment-toincome ratio, properties with poor conditions and unstable neighborhoods usually are also associated with a higher default risk. The second generations research was from the borrowers perspective and probed borrower payment models. The models are based on utility (net wealth) optimization in consumer theories and option-based choices. The utility (net wealth) optimization theories indicate that when borrowers make decisions (timely payment, prepay, refinance, or default) in their mortgage performance they base those decisions on the maximization of their net wealth. The option-based models view default as a put option, where the borrowers can sell the property back to the lender for the value of the mortgage at the beginning of each payment period. Those mortgage performance choices are determined by many factors, such as transaction costs, family crises and mobility decisions. The third generations research was from the perspective of large financial institutional loan pools and financial regulators. The research explored, for example, how 12

default happens on an FHA-insured mortgage or on a fixed-interest mortgage, and how some regulations (e.g., capital requirements) affect mortgage default. But the studies of the third generations are more complete and have considered the roles of all three sectors: lenders, large financial institutions and regulators, and borrowers. Quercia and Stegman concluded that there are still some obstacles in the research. One of the greatest is the lack of data about changes to borrower, lender and property information over time, which limits the research to some extent. But the most difficult problem is the lack of data about borrowers issues and decisions. They also indicate that mortgage default models need to incorporate not only the role of borrowers but also the mobility decision of borrowers.

Mortgage Default and Foreclosure Factors There are many factors determining the possible mortgage default risk of certain loans, but loan-to-value ratio, payment-to-income ratio, householders occupation (with or without volatile income), property and neighborhood condition, regional unemployment rate, transaction costs, crisis events, and borrowers expectations are some of the major elements contributing to the risk of mortgage default and foreclosure (Quercia and Stegman, 1992; HUD, 1992; Vandell and Tribodeau, 1985). Among those factors, the macro economic situation, housing price appreciation and neighborhood characteristics are macro spatial factors that help determine borrower characteristics in certain geographical areas and, therefore, the loan characteristics associated with those borrowers. Using those factors, loan default risk in certain geographical areas can be measured. According to previous literature on mortgage default 13

and foreclosure, the following is a list of major factors contributing to mortgage default and foreclosure, although some of them are correlated to others: Macro economic situation Mortgage loan characteristics Types of Mortgage Products Borrower characteristics and default decisions Mortgage lending legislation and foreclosure legislation Lender decisions in mortgage foreclosure Housing attributes Housing appraisal Housing price appreciation Mortgage fraud Neighborhood characteristics. I will discuss each of these briefly, though they are not the focus of this dissertation.

Macro economic situation Studies have found that mortgage default is largely related to macro economic changes over time. The most obvious indexes that are associated with mortgage default are the unemployment rate, interest rate, and housing price index. Bellamy (2002) found that in Ohio between 1994 and 2001 the unemployment rate fell consistently, with minor volatility, but foreclosure filings increased consistently. Therefore, he suggested that the increasing foreclosure rates in Ohio are not solely dependent on the economic situation. A report from Policy Matters Ohio in 2004 assumes 14

a weak economy since 2001 to be one of the leading reasons for the high foreclosure rate in Ohio in recent years. Case and Shiller (1996) found that high mortgage default rates strongly follow real estate price declines or interruptions of real estate price increases. Also, mortgage delinquency and foreclosure rates themselves are important economic indicators (Frumkin, 2000).

Mortgage Loan Characteristics Loan characteristics are important factors that can affect mortgage defaults and foreclosures. In early research there were many interesting findings, such as that the interest risk is one indicator of mortgage risk, and a higher loan-to-value ratio means more default risk. Many studies found that the initial loan-to-value (LTV) ratio has a significant influence on mortgage default (Von Fustenberg, 1969, 1970a, 1970b; Deng and Gabriel, 2002; Calhoun and Deng, 2002; Ambrose et. al. 2002). The LTV ratio directly determines the equity position of a borrower (HUD, 2004), and HUD found that a high LTV ratio is associated with a high default rate by examining FHA-insured and GSE (Government Sponsored Enterprises: Fannie Mae, Freddie Mac and Ginnie Mae)purchased loans. Von Furstenberg (1969, 1970a, 1970b) thought that home equity at the time of loan origination is highly related to mortgage default. When the LTV ratio is raised by seven percentage points from 90% to 97%, default rates for new homes increase by seven times. But research found that in subprime mortgages the LTV has little effect on loan performance (OCC, 2003). Quercia et.al. found that LTV ratio does not affect

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default in their panel data of rural low-income mortgage borrowers (Quercia et. al., 1995). Interest rates that financial institutions charge to loan borrowers reflect the expectations from the lenders about default potential. The lenders are hedging possible losses from credit risk, so interest rate should be related to mortgage default risk (Jung, 1962). The yield curve slope therefore should be a factor contributing to mortgage defaults (HUD, 2004). This hypothesis was later proven by other research. For example, Page (1964) found that default risk was related to property values; financial institutions are willing to issue loans with a lower interest rate to borrowers purchasing a high-value property. A borrower who caught a loan to buy an expensive house probably has good credit so their interest rate is low. In a situation of burnout1, where borrowers passed up some previous good opportunities to refinance the mortgage at a more favorable interest rate, they have a higher tendency to default because of the high interest rates (HUD, 2004). Ambrose and Sanders (2003) also found that the change in yield curve has a direct impact on the probability of mortgage default. Besides interest rates and LTV ratios, loan term length and the age of the mortgage are also important factors (von Furstenberg, 1969). Von Furstenberg (1969) found that mortgage default risk positively correlates with the term of the mortgage and a mortgage younger than 3 or 4 years is at higher risk as well. HUD (2004) found that loan size is also a factor in determining loan default risk by exploring both PMI (Private Mortgage Insurance) and FHA loan data. Smaller loan sizes usually are associated with a higher default rate, which might be because that low-income borrowers, low-liquid-asset borrowers, or borrowers with high income-volatility tend to 16

have smaller loans. That can also indicate high housing price volatility in low-priced houses. Quercia and Stegman (1992) stated that default patterns for adjustable rate mortgages (ARMs) were not comprehensively studied before. With ARMs, payment shock due to unexpected interest rate increase is one of the important reasons for people to default. Early ARM payment accounts for the impact of the change of payment coupon from an initial low rate (teaser rate) to an index-adjusted rate during the first year of the loan. Therefore, early ARM payment can also explain some of the default risk. Another factor contributing to mortgage delinquency and default is the presence and holding status of junior or subordinate loans and liens (Herzog and Earley, 1970; LaCourLittle, 2004). Their research found that junior or subordinate loans and liens might increase the default risk of primary loans.

Types of Mortgage Products Product types such as FHA-insured, VA-insured, Conventional, ARM, FRM (Fixed Rate Mortgage), GRM (Graduated Rate Mortgage) and subprime loans affect mortgage default risk due to their own characteristics. According to the Mortgage Bankers Association, FHA loans usually have a higher foreclosure rate than conventional mortgages. But determinants of delinquency rates in different types of loans are different, especially for some non-profit community lending organizations in which social networks, business culture, funding sources, composition of the board and loan committees, staff structure, loan intake, and collection tools are major organizational factors affecting loan delinquency rate (Baku and Smith, 1998). 17

The role of subprime and predatory lending on increasing mortgage foreclosures is addressed by many previous studies and in different states such as Ohio, Indiana and Arizona (Realtors, 2003; Goldstein, 2004; Rhey and Posner, 2004; Stock et. al., 2001). A study of the differences in mortgage default rates of prime and non prime mortgages indicates that these mortgages are significantly different in many aspects, such as different risk levels at the loan origination. They both default at elevated levels but respond differently to incentives to prepay or default (Pennington-Cross, 2003). The study also found that mortgage default is less responsive to the amount of equity when credit scores are included in the analysis.

Borrower Characteristics and Default Decisions Default decisions made by borrowers are determined by many factors. A default is usually due to two situations: inability to pay and/or unwillingness to pay. Those two scenarios should be separated when exploring mortgage default decisions. In addition to factors described in the preceding section on borrower characteristics in mortgage default risk models, certain events such as changes in borrower characteristics and life crises can also make borrowers choose default. The most important such factors are job loss, family structure change (such as divorce, children going to college, or decease of a financially supportive adult), and moving. When terminating a mortgage, the decision of a household to default is determined by the borrowers perception of the value of the mortgage versus the value of the home. When the house is perceived to be less valuable than the outstanding mortgage balance, a decision to default might be made and this is a voluntary default decision. Another 18

scenario plays out when a household experiences crisis events and cannot afford the scheduled mortgage repayment. They might be forced to default and this is an involuntary or compulsory default decision. However, the decision to foreclose after a household defaults is on the lenders side, based on their strategies to minimize mortgage losses and operating costs. Borrower characteristics such as ethnic background, income, collateral and credit scores are always major factors in determining mortgage default risk (Bunce et. al., 1999; Cotterman, 2002). But many of these characteristics are correlated to a certain extent, and credit score is in particular highly correlated to these other characteristics. Bunce et. al. (1999) found that credit history plays a very important role in mortgage foreclosure and loss severity in FHA loans. Cotterman (2002) also found that the effect of credit history on mortgage default is very significant. Empirical studies usually focus on loan loss rates and default probabilities (Cotterman, 2004). This leads to financial institutions having different underwriting standards for borrowers with different default probabilities and credit histories. Based on loan loss rate and default probabilities, the institutions can decide how much credit-loss reserves they should hold against credit risks. Early research on mortgage default developed two alternative theories, equity theory and borrowers credit history theory. The equity theory states that negative equity is related to default. The credit history theory states that better credit history is associated with a lower tendency to default. But negative equity is not always a good explanatory factor for why borrowers default because a default will harm the borrowers credit worthiness, while credit history is also related to other characteristics of borrowers (such as income level and stability). Therefore, in addition to examining the impact of equity 19

and credit history on mortgage default risk, recent research has begun to focus more on comprehensive loan characteristics, borrower characteristics, and property and neighborhood characteristics. The payment-to-income ratio is thought to have a significant effect on mortgage default, but empirical studies show mixed results. Therefore, we cannot say that its impact on mortgage default is significant (HUD, 2004). Earlier research found that the effect of income on mortgage default was ambiguous (HUD, 1992). However, Van Order and Zorn (2002), in a recent study of competing risk of mortgage termination, found that borrower income is an important determinant for mortgage default decisions when the borrowers property has negative equity. Although few studies have focused on income levels, many have tried to examine the impact of income variability (stability and growth) on mortgage default. Van Order and Zorn (2002) also found a positive relationship between income variability and the mortgage default rate. This means that high volatility of income is usually associated with a high default rate. Borrowers with certain occupations, such as those who are self employed, those whose major income depends on commissions, and those with low-skilled jobs (HUD, 2004), have high income volatility. Research also found that borrowers with low liquid assets have a higher mortgage default probability (HUD, 2004). In several studies the impact of a borrowers ethnic background was greatly reduced by controlling other characteristics, such as down payment and credit history (Cotterman, 2002; Van Order and Zorn, 2002). Therefore, many researchers believe that loan default differences among different racial groups can be better explained by down payment amount and credit history of the borrowers. Some think that racial minorities are more 20

likely to become targets of predatory lending, but little attention has been paid to possible racial disparities in mortgage performances, mortgage default and mortgage foreclosures. Only in recent years have some scholars noticed this issue (Lauria and Baxter, 1999; Lauria, 1998; Baxter and Lauria, 2000). Mortgage default will affect the future credit worthiness of a borrower. But for some borrowers, repeated mortgage decisions can be observed. Ambrose and Capone (2000) found that borrowers with a first default have a greater risk for a second default, and the risk is also greater when the time difference between two defaults is shorter than two years. They also found that the economic factors affecting the first default have no effect on the second default. The findings of this study imply that the ability of borrowers to obtain another mortgage will be lower since they have been found to have a higher default probability in their second mortgage.

Mortgage Lending Legislation and Foreclosure Legislation The impact of mortgage lending legislation on foreclosure is under-investigated because of the difficulty of evaluating how legislation contributes to foreclosure. But recently, with the increasing awareness of mortgage foreclosure, some non-profit organization and concerned citizen groups have begun to question whether loose mortgage lending legislation and regulations are an important factor affecting foreclosure. They might especially affect the geographically clustered distribution of foreclosure in low-to-moderate-income neighborhoods. The major agenda that these groups propose is to enact anti-predatory lending legislation and require real estate and mortgage brokers/agents and real estate appraisers to pass stricter licensing exams. At the 21

same time, a strong enforcement and supervising system should be set up to monitor the ethical behavior of these professionals. Some states have anti-predatory lending laws and these seem to work quite well as borrower protection (Stegman et. al., 2003). Foreclosure laws are different in different states. Some states require the judicial process of foreclosure while some do not. According to previous research on the impact of foreclosure laws on foreclosure rates, costs are much higher in states that have strict foreclosure laws and require judicial processes than in other states (Pence, 2003). HUDs report on alternatives to FHA-insured loan foreclosures recommended that Congress create uniform national foreclosure laws to reduce the possible influence of foreclosure laws on foreclosure decisions of the lenders (HUD, 1986). The report also mentioned some detailed recommendations on adjusting the timing and notification procedure of the foreclosure process, which allows lenders to incur lower costs in negotiating foreclosure alternatives and also allows borrowers to have more time to recover the loan repayment. Phillips and VanderHoff (2004) believe that the efficiency of mortgage default resolution alternatives would be improved greatly given appropriate legal and regulation reforms. In a study of FHA-loan loss rate and default probability, Cotterman (2004) found that states with judicial foreclosure procedures incur higher loan loss rates than states without judicial procedure. By thoroughly comparing state foreclosure law differences and exploring their impact on mortgage costs at the origination of mortgages, Pence (2003) found that in states with foreclosure-friendly legislations higher costs were imposed on borrowers at the origination of mortgages.

22

State bankruptcy laws also have some impact on default decisions of borrowers. Lin and White (2001) found that in states with higher bankruptcy exemptions borrowers have greater tendencies to choose default.

Lender Decisions in Mortgage Foreclosure There are three possible outcomes when a mortgage is defaulted: (1) resumption of payments, (2) termination by prepayment, or (3) foreclosure (Phillips and VanderHoff, 2004). The value of termination options and local economic and housing market conditions affect default resolution probabilities greatly. After a study of loan pools in a large national savings and loan institution, Phillips and VanderHoff (2004) found that judicial procedure and tenancy statutes decrease the probability of foreclosure by 25%, due to the increasing costs of foreclosure. They also indicate a possibility of adjusting mortgage rate premiums to compensate the added costs to lenders. For FHA-insured loans, lenders do not bear many foreclosure costs when foreclosures occur (Realtors, 2003). This could be one of the reasons why FHA loans have a high foreclosure rate. The amount of time between mortgage default and foreclosure is different depending upon the mortgage interest rate and home equity values (Lauria, 2004). Lauria found that lower interest rate loans and loans with an outstanding balance below the median value of the home were given a longer time from default to foreclosure. Whether there is racial discrimination in the foreclosure process is still unclear.

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Housing Attributes Housing attributes, such as the number of bedrooms in a dwelling and the units in the building, building type, and building year, are important factors in loan approval in the automated mortgage scoring system of many types of mortgages, and this is where home equity values could go. Therefore they can be important indirect factors affecting mortgage default risk (Sandor and Sosin, 1975).

Housing Appraisal In research on the role of real estate appraisal on mortgage lending and performance in Alaskas housing market, Lacour-Little and Malpezzi (2003) found that if the appraisal value of a property is higher than the estimated price from a hedonic model they developed, the mortgage against this property is exposed to more default risk. In other research, Lacour-Little and Green (1998) found that minorities and minority neighborhoods are much more likely to get low appraisals, which increases the loan application rejection rates of racial minorities. But they found that the low appraisal is related to poor neighborhood and housing quality. Noordewier et. al. (2001) found that properties with a higher appraisal value than similar recently sold properties are related to higher default risk of the borrowers.

Housing Price Appreciation Housing price change is a very important factor in determining mortgage default probabilities. This is true, first, because of the possibility of negative equity, which affects mortgage default decisions greatly (Quigley et. al., 1993), is largely determined by 24

housing price changes (Case and Shiller, 1996). Second, as housing prices fall, the loss severity followed by a default increases, and loss severity increases non-linearly and faster than the decline of housing prices (Case and Shiller, 1994). Third, the research on housing price appreciation in low-income and/or minority neighborhoods should help explain the disparities among mortgage foreclosure rates in different neighborhoods (Raffalovich, 2002). By examining neighborhood effects on FHA-insured loans, Cotterman (2001) found that low housing price appreciation in minority neighborhoods is an important factor in the higher default rates in those neighborhoods. Housing price appreciation is also an important motivation for people to move (Kiel, 1993). When a moving decision is made, borrowers will choose either to sell or default on the property in which they currently reside (Pavlov, 2001). When the equity value is positive they will usually choose to sell the property and prepay the mortgage. But when the equity value is negative and cannot offset default costs, they will choose to default. However, only a small percentage of borrowers actually choose to default in this situation. Their decision might be more determined by life crisis events because choosing default is costly for borrowers in regard to its negative impact on borrower credit scores (HUD, 1992; Foster and Van Order, 1985).

Mortgage Fraud Foreclosure cases because of mortgage fraud are few and there is no literature related to the relationship between mortgage fraud and foreclosures. Hence there are no empirical studies conducted to see how mortgage fraud affects foreclosure. The definition of mortgage fraud can be very broad, but here it means that lenders use some illegal 25

means to force borrowers to default and then foreclose on the houses. In some situations the lenders will conspire with pre-foreclosure investors to force the borrowers, who are often called motivated sellers by those investors, to foreclose in order to gain profits from the auction or selling process prior to the auction. But those cases are very limited, so the impact of mortgage fraud has not drawn the same attention as unethical behavior of real estate brokers/agents or mortgage brokers/agents to seduce a potential borrower to take an unaffordable mortgage by not explaining the benefits and costs of owning a home, and the full costs of buying a house.

Neighborhood Characteristics Some studies have found that loan defaults concentrate in neighborhoods with a high percentage of poor-credit borrowers, whether the mortgage is FHA-insured, VA-insured, or conventional (Cotterman, 2003). The concentration is not randomly distributed, and it changes over time. Cotterman found that census tracts with a high percentage of AfricanAmerican and low to median income borrowers usually have higher default probabilities, controlling for race and the credit history of the borrowers. Race and income have no effect on individual default probabilities. But other studies show that there is no correlation between neighborhood characteristics and mortgage default (HUD, 2004). Therefore, the impact of neighborhood characteristics on mortgage default is still unclear, and further research is needed to provide more compelling evidence of whether minority and/or low-income neighborhoods see a higher default rate than other neighborhoods. Some prior studies have used mortgage default as an indicator of mortgage lending discrimination. The authors argue that if discrimination does exist, it means that Blacks 26

and other minorities are required to have a higher standard than Whites in loan approval, and thus Blacks and other minorities have a lower tendency to default because those who can have a loan are those who meet the higher standards; also minorities tend to have less attractive distributions of factors leading to default compared to whites because of the more strict underwriting standards (Cotterman, 2004). But a study by Berkovee et. al. (1994, 1995) found that black homeowners have a higher default rate than white homeowners, which contradictorily indicates that mortgage default has no relationship to lending discrimination. Anderson and VanderHoff (1999) also found that Black homeowners have a higher marginal default rate than white households, controlling for borrower and property characteristics. Other scholars found that there are flaws with using mortgage default to predict mortgage lending discrimination (Ross, 1996; Anderson and VanderHoff, 1999). Controlling credit history reduces the effect of races on mortgage default (Cotterman, 2002). Deng and Gabriel (2003) and Van Order and Zorn (2001) found that minorities have higher default probabilities, but the losses from their high default risk can be offset by their low tendency for prepayment. They recommend that financial institutions should have similar pooling and risk-based mortgage pricing for all borrowers, which will benefit more racial minorities and therefore improve their homeownership rate. Cotterman (2004) concluded that Blacks and Hispanic borrowers incur a larger loan loss rate than Whites in FHA-insured loans, but he did not explore whether the loss could be offset by the lower prepayment tendency of racial minorities. Therefore, many researchers think that racial disparities in mortgage default can be explained by other factors, such as down payment amount and credit history, which 27

reduces the effect of race on mortgage default greatly (Cotterman, 2004). Anderson and VanderHoff (1999) found that racial differences in mortgage default might be explained by the differences in default costs and transaction costs. Economic theory suggests that, holding other things constant, high-quality neighborhoods will have high bid-rents. Racial composition is often used as an important indicator of neighborhood quality (Galster and Hill, 1992; Can and Megbolugbe, 1997; Can, 1992a, 1992b; Brooks-Gunn et. al., 1997). Thus it is one of the important neighborhood factors that might contribute to the foreclosure rate in the neighborhood, or it might act as a proxy for other variables. However, there is scant literature that explores whether and how other neighborhood characteristics might affect the foreclosure rate in the neighborhood.

Summary of Mortgage Default and Foreclosure Literature The preceding literature review on mortgage foreclosure and the factors that affect it shows that the topic is very complicated. In addition, many of the variables are highly correlated to each other. Thus, general regression models might not be sufficient to explain the relationship among these factors and foreclosure. Exploring the literature as it relates to mortgage foreclosure, I propose an illustration (Figure 2.1) to show how these factors affect mortgage default and foreclosure structurally. This complicated diagram has become the theoretical basis of my spatial and SUR models in this research, although this study focuses on only two of the many factors related to mortgage foreclosure: neighborhood characteristics and changes in these characteristics. Neighborhood characteristics and changes in characteristics are two of the under-investigated factors in 28

mortgage foreclosure. Moreover, this study will not only look at the neighborhood effects on mortgage foreclosure, but also the impact of foreclosure on neighborhood characteristics, which has not been done before. Therefore, this study will contribute to the scant literature on the interaction between neighborhood characteristics and mortgage foreclosure. In Figure 2.1, notice that I aggregated factors into several major categories: the macro economic situation, borrower characteristics, neighborhood characteristics and change, housing characteristics, and loan characteristics. Some other factors, such as lender decisions, lending and foreclosure legislation, and mortgage fraud, will be incorporated into those major factors. The impact of lending and foreclosure legislation on mortgage foreclosure is partially related to loan characteristics and lender decisions in foreclosure, although the impact is unclear. Mortgage fraud is not present in all (or even most) foreclosure cases; therefore, the effect of mortgage fraud on foreclosure is not as significant as the effect of many other factors. Mortgage fraud might relate to borrower characteristics (what kinds of borrowers may easily become the target of mortgage fraud) and loan characteristics (what kinds of loans are more often involved in mortgage fraud). Those major categories (the macro economic situation, borrower characteristics, neighborhood characteristics and change, housing characteristics, and loan

characteristics) affect each other, and the macro economic situation is the starting point and the only exogenous variable to affect all other categories. The other categories are somewhat related to each other in causal and directional relationships. Each category will include detailed indicators that might also relate to each other (not illustrated in Figure 2.1), but all of these categories have some mutual causal relationship with foreclosure. 29

Macro Economy

Borrower Characteristics

Neighborhood Characteristics & Changes

Housing Price Change Vacancy Rate Tenure Status Racial Composition

Housing Characteristics

Mortgage Attributes

Credit History

Income

Ethnicity

Housing Attributes

Housing Appraisal

Housing Equity

Interest Rate

LTV

30
Default Foreclosure (Lender Decisions)

Figure 2.1: The Interaction between Residential Mortgage Foreclosure, and Neighborhood Characteristics and Change

The Interaction between Neighborhood Characteristics, Neighborhood Change and Residential Mortgage Foreclosure
General Theories of Neighborhood Change As mentioned earlier, the development of neighborhood change theory can be summarized into three generations and research concentrations (Galster and Krall, 2003). Because these generations have temporal overlap, it is not appropriate to conclude that they have specific temporal orders. Many contemporary scholars still use the theories formulated in the first generation in their research. Many conduct their research on neighborhood change based on the theories of one of the three generations, or the combined theories from two or three generations.

1. The first generation: descriptive, cartographic and causal analysis (1950

Simple descriptive, cartographic and causal analysis dominates in this generation. The major theoretical bases are the invasion-succession model that was proposed by the Chicago School of Sociology (Park, 1952; Duncan and Duncan, 1957; Taeuber and Taeuber, 1965), the life-cycle model (Hoover and Vernon, 1959), the

demographic/ecological model, the social-cultural/organizational model, the social movement model (Downs, 1981; Bradbury, et. al., 1982; Schwirian, 1983), the stage model, and the political-economy model. These theories have been followed by Maclenna(1982), Taub, et. al. (1984), Grigsby, et. al. (1987), Rothenburg et. al. (1991), Temkin and Rohe (1996), Lauria (1998), and Galster (2003). All these theories have formed the fundamental basis of neighborhood change theory by describing how neighborhoods change, the push and pull factors of the change, and what factors are affected the most in the neighborhood-succession process. Some of the theories use 31

mechanisms in other disciplines, for example, ecology, to explain the dynamic processes of a neighborhood. This research will use some of the aforementioned methodology, such as cartography and descriptive and causal analysis to explain how foreclosures and neighborhood characteristics and change interact with each other. Some of the terms developed in this generation, such as racial transition and exogenous variables, will be used extensively in this research.

2. The second generation: regression and predictive models (1970

Regression and predictive models are used to explore how exogenous variables affect neighborhood outcome indicators and estimate-related indicators (Galster and Krall, 2003). Examples of those indicators are population density (Guest, 1972, 1973; Fogarty, 1977), income or social class (Guest, 1974; Vandel, 1981; Coulson and Bond, 1990; Galster and Mincy, 1993; Galster et. al., 1997; Carter et. al., 1998), homeownership rate (Baxter and Lauria, 2000), female headship rates (Krivo et. al., 1998), and racial composition changes (Guest and Weed, 1976; Schwab and Marsh, 1980; Ottensmann et. al., 1990; Galster, 1990; Denton and Massey, 1991; Ottensmann and Gleeson, 1992; Lauria and Baxter, 1999; Crowder, 2000; Ellen, 2000; Baxter and Lauria, 2000). There are mixed findings in the studies, but all these indicators provided the basis for this research when selecting variables. Similarly, when exploring the impact of foreclosure on neighborhood characteristics and change, foreclosure rate is the exogenous variable that affects the neighborhood indicators and their change. Only a few scholars have paid attention to this matter. This research will also use regression and

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predictive models to find out how foreclosures and neighborhood characteristics and change interact.

3. The

third

generation:

threshold

effect,

endogenous )

neighborhood

theory,

neighborhood tipping and complexity models (1990

In more recent neighborhood-change literature, Quercia and Galster (1997, 2000) proposed a new theory that is called the Threshold Effect, which is defined as a dynamic process in which the magnitude of the response changes significantly as the triggering stimulus exceeds some critical value (Quercia and Galster, 1997: 409). They advocate using non-linear regression models to predict threshold effects of the change in neighborhood indicator outcomes caused by exogenous variables. Spline and quadratic regressions are used in their studies of the threshold effects and neighborhood change. Galster et. al. (2000) empirically tested the theory by analyzing some exogenous variables on neighborhood quality-of-life indicators. Many people have explored how exogenous variables affect the change in neighborhood outcome indicators, but little has been done to explain how these indicators change endogenously after the breakdown in stability by the exogenous variable. Schelling (1971, 1972), and Galster and Krall (2003) are among several people who have explored the endogenous dynamic change of the neighborhood outcome indicators affected by exogenous variables. They named the model Neighborhood Tipping. Complexity Models evolved from the neighborhood tipping theory. This generations study of neighborhood change has created a new and interesting scenario. The proposed methodology can be used to determine the extent that

33

foreclosures (the exogenous variable) affect the change in neighborhood indicators (endogenous variables). Then, the threshold points at which the endogenous variables change from stability to instability will be calculated. When foreclosures have contributed to homogenous racial composition, the effect is very similar to the Neighborhood Tipping theory.

Major Neighborhood Indicators Estimated In these three generations of research, many neighborhood indicators have been explored for their potential importance to the dynamics of neighborhood change: Income or Social Class (Guest, 1974; Vandel, 1981; Coulson and Bond, 1990; Galster and Mincy, 1993; Galster et. al., 1997; Carter et. al., 1998) Homeownership Rate (Baxter and Lauria, 2000) Female Headship Rates (Krivo et. al., 1998) Racial Composition Changes (Guest and Weed, 1976; Schwab and Marsh, 1980; Ottensmann et. al., 1990; Galster, 1990; Denton and Massey, 1991; Ottensmann and Gleeson, 1992; Lauria and Baxter, 1999; Crowder, 2000; Ellen, 2000; Baxter and Lauria, 2000) Median Value of Homes (Galster and Krall, 2003) Property Delinquency Rate (Galster and Krall, 2003) Poverty Rates (Carter et. al., 1998; Galster and Mincy, 1993; Galster et. al., 1997; Vandell, 1981; Krivo et. al. 1998) These studies have found that some of the variables have complicated endodynamic and exodynamic changes (e.g., poverty rate and change). Others are affected by

34

exogenous variables, such as foreclosures or metropolitan economic restructuring affecting the racial transition of a neighborhood. This research will continue to test how foreclosures and these selected variables interact with each other because all these variables are very important indicators of neighborhood quality.

Theories of Neighborhood Change Neighborhood change is an important focus in urban theory and social science. The literature on neighborhood change, which is quite abundant, mainly focuses on social or economic explanations of change. The economic explanation of neighborhood change focuses on residential preferences and the interplay of supply-demand relationships in local housing markets (Baxter and Lauria, 2000). A simplified version of this idea says that many industries and jobs moved out to the suburbs because of the development of the transportation network, the universal use of automobiles, and land price differences inside and outside of the city center. The process is followed by the out-movement of residents and workers who can afford both the transit and housing costs in the suburbs and who prefer a less dense living environment. Those residents who cannot afford those costs are left behind, and many of them lose their jobs. With the decline of economic activities and household income in those neighborhoods, housing demand decreased due to lack of housing appreciation, safety, appropriate municipal service, and other factors that impact homebuyers preferences (Galster, et. al. 1997; Squires, 1994; Wilson, 1987, 1996). In the economic explanation, neighborhood change starts as household segregation by income levels (Grigsby et. al., 1987). The classical stage model explains in more detail the process of

35

neighborhood succession (Bradbury, et. al., 1982; Downs, 1981; Faris, 1967). With rapid inner-city development, land becomes much scarcer and its value increases rapidly. Overcrowding, deteriorating living environment, and increased crime rate then become major issues facing inner-city neighborhoods. As a result, affluent people, who can afford to choose more preferable housing situations, will move out to the less dense and more livable suburb (Muth, 1969). The development of highway systems and the universal use of automobiles stimulated the process. People who cannot afford to move stay in the neighborhood. Many previously owner-occupied buildings are remodeled into cheap multifamily rental units, and many people with low incomes move into the neighborhood because it is close to work or school or because rents are low. The maintenance of these old buildings is very poor, and landlords are not willing to invest to rehabilitate the buildings because of low return potentials. The change from single family houses to multifamily rental units made some neighborhoods more crowded than before, but in some neighborhoods with low housing demand, the abandoned houses stayed empty most of the time and finally became dilapidated, which negatively affects the city landscape. Income, housing and neighborhood preferences of households determine the establishment of the income-segregated housing submarkets (Grigsby et. al., 1987). This segregation process is often called filtering in urban housing market theories (Grigsby et. al., 1987). Supplementing the stage theory, the neo-Marxist explains that economic change, which causes household income change and neighborhood decline, is due to the industrial shifts during the worldwide industrial revolution (Harvey, 1973; Logan and Molotch, 1987). Many neighborhoods lost manufacturing jobs, and the neighborhoods where

36

manufacturing workers lived began to decline due to unemployment of those workers (Grant, 1995; Harrison and Bluestone, 1988). In recent years, especially after September 11th, 2001, the U.S. economy experienced slower development, with increasing unemployment and government budget deficit. Many large corporations continued and even accelerated the movement of jobs overseas, which contributed to increasing unemployment. Job loss and economic recession created good reasons for homeowners to default on their mortgages, which further affected neighborhood-succession processes. Economic change, especially when related to industrial sector shifts, affects more people who lack skills and education because it is not easy for them to transfer to another job sector (Jargowsky, 1997). Also, with the hiring of large numbers of cheaper, immigrant laborers, local unemployed workers found it even more difficult to find a lower level position. Wilson (1987, 1996) explains in more detail about how the dual labor market contributes to the concentration of poverty in inner-city neighborhoods. Major social theories are institutional and place-stratification theories. These argue that racial and class identification and stereotypes affect decisions in lending and residential location made by residents, real estate agents, and bankers (Lauria, 2000; Farley et. al., 1994; Massey and Denton, 1993; South and Crowder, 1997). Many scholars believe that racial segregation is an institutional process that causes poverty to concentrate in certain neighborhoods and affects neighborhood change (Eggers and Massey, 1992; Massey, 1990; Massey and Denton, 1993; Massey and Eggers, 1990). These authors argue that racial composition or racial change is an important proxy for neighborhood characteristics and change (Immergluck and Smith, 2003; Clark, 1992; Ellen, 2000; Taub et. al., 1984). Some other scholars think that racial discrimination may

37

be occurring in housing markets because housing supply and demand is not sufficient to explain neighborhood change without considering the effects of discrimination (Cook, 1988; Galster, 1990; Galster and Hill, 1992; Squires, 1994). This research will test whether these theories are affecting neighborhood change in Ohios two biggest counties. These theories are also part of the basis in variable selection, such as median household income, unemployment rate, and occupational structure. The change in the aforementioned indicators might affect foreclosures in a neighborhood. Foreclosures might impact on the change in these indicators and thus contribute to neighborhood decline. The research might also discover some social factors (e.g., racial transition) underlying the relationship between foreclosures and neighborhood characteristics and change.

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The Interaction of Foreclosure and Neighborhood Characteristics and Change Little literature contributes to our understanding of the relationship between neighborhood change and residential mortgage foreclosure or the mechanics of that relationship. Stone (1986) indirectly related neighborhood change with the mortgage default rate. He found that higher default risk and foreclosure rates usually follow the change from economic boom to economic downturn, especially for homeowners who paid a high interest rate and an inflated housing price during the economic boom. Much of the literature fails to address the geographical concentration of foreclosure and its impact on neighborhood conditions (Cincotta et. al., 1998). Lauria and Baxter (1998, 1999, 2000) are two of the few scholars who have tried to explain how neighborhood change and characteristics affect mortgage foreclosure. Baxter and Lauria (2000) think that mortgage foreclosure is one of the factors mediating the effects of neighborhood economic situations and racial composition on neighborhood tenure patterns, vacancy rates and racial composition changes. They believe that low housing price appreciation and low incomes caused by economic downturns and neighborhood succession are the main reasons for foreclosure, and foreclosure, in turn, affects neighborhood changes in racial transition and income changes. But they do not explain in detail whether or how mortgage foreclosure affects housing price appreciation in a given neighborhood. Although negative equity is one reason leading to mortgage default and housing abandonment (Case and Shiller, 1996; Cunningham and Capone, 1990), it might only affect a small portion of the total foreclosure cases. But mortgage foreclosure might affect housing price change greatly in neighborhoods with concentrated foreclosures.

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Baxter and Lauria (2000) found that income decreases and housing price depreciation, which are major factors contributing to mortgage foreclosure of borrowers, are associated with economic changes and prior racial composition. The high foreclosure rates in declining neighborhoods will affect neighborhood change in many aspects, such as housing stock characteristics (vacancy rate, tenure status and housing price), racial composition, and median income of the neighborhood. Also, the long-term impact of housing foreclosures on the social-economic structure of a neighborhood depends on the characteristics of the purchasers of those foreclosed properties (Lauria, 1998). Cotterman (2001, 2003) found similar neighborhood effects on mortgage foreclosures and racial disparities in mortgage foreclosure.

Neighborhood Effects in Mortgage Default and Foreclosure In addition to the fact that loan defaults concentrate in neighborhoods with a high percentage of poor-credit borrowers (Cotterman, 2003) and poor-quality neighborhoods, no correlation between neighborhood characteristics and mortgage default has even been found (HUD, 2004). Therefore, the impact of neighborhood characteristics on mortgage default is still unclear, and very few studies have been done to explore the neighborhood effects on mortgage default and foreclosure. Cotterman (2001) examined how neighborhood and borrower characteristics affect FHA default rates. His combination of neighborhood and borrower characteristics is to separate the two effects (neighborhood and borrower effects) by controlling the effect of each other. His study also includes credit history data for the individual borrowers. The study found that higher default rates are associated with census tracts that have lower

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median household incomes and higher concentrations of black homeowners, but individual race or income is not related to default. The effect of neighborhood race and income was reduced when lagged default, prepayment and neighborhood housing price change were added to the regression model. In this situation, the effect of neighborhood income on default is unchanged, but the effect of neighborhood racial composition on default is not significant. Williams et. al. (1974) found that neighborhoods with high unemployment rates usually have higher mortgage default rates. Their finding is not surprising because often a higher unemployment rate is associated with lower income and, thus, a higher default rate. Sandor and Sosin (1975) found that neighborhood conditions are negatively related to the mortgage interest rates that financial institutions of loan originators charge to the borrowers. But they did not further explain whether those conditions are related to mortgage discrimination, or whether they are caused by the aggregated individual borrowers with poor credit scores who thus receive higher interest rates. In terms of the spatial distributions of mortgage default and foreclosure, Von Furstenburg and Green (1974) found that in the 1970s suburban areas had less default risk than central-city locations, which might not be true in the contemporary setting. Notice that many of the aforementioned studies focus on neighborhood effects on mortgage default and default risk, while the relationship between neighborhood characteristics and mortgage foreclosure is less investigated, except for a few scholars work. Can (1998) states that when lending institutions make decisions about mortgage underwriting or portfolio management, they consider many different factors at the

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neighborhood level, such as recent house price movements, unemployment rates, vacancy rates, and homeownership rates. Thus, the lending decision will cause mortgages with similar characteristics to concentrate in certain areas. She claims that foreclosure is spatially contagious. She states, An abandoned property resulting from foreclosure in a neighborhood acts as a catalyst by reducing the expected return on investment on surrounding properties (Can, 1998: 68). The direct consequence of this phenomenon is lower quality housing, including those houses adjacent to the foreclosed ones; lower demand for those houses, and thus lower prices of the houses; higher Loan-to-Value (LTV) ratios; and increased risk of adjacent properties going through foreclosure and abandonment. If the contagious chain keeps working, the final result is large-scale neighborhood decline and increasing housing vacancy rates. Also, the large number of foreclosed properties in a neighborhood will further reduce the housing prices in the whole neighborhood because of the increased housing supply. This spillover effect of foreclosure also contributes to the concentration of foreclosed properties in certain neighborhoods. Baxter and Lauria (2000) found that both economic change and prior racial transition are associated with the reduction in median household income. Therefore racial transition, unemployment and the reduction in household income causes the foreclosure rate to increase rapidly. They concluded that racial transition and economic change indirectly affect neighborhood decline through reduced income and increased foreclosure. Neighborhood decline is associated with higher vacancy rate, higher percentage of a black population, and higher percentage of renters.

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The Impact of Mortgage Foreclosure on Neighborhood Restructuring The impact of mortgage foreclosure is complicated, and many parties are affected. For borrowers, losing their real property and titles and being driven out of their home is the biggest direct loss; but the credit problem caused by foreclosure might be an obstacle when they want to purchase homes again in the future. It would be very interesting to explore the impact of mortgage foreclosure on borrowers and where they live after losing their homes. For lenders, foreclosure brings about operational costs and income losses on the mortgages. The impact of foreclosure on neighborhoods is also significant and many neighborhood indicators are thought to be affected by mortgage foreclosure.

The Effect of Mortgage Foreclosure on Racial Composition and Transition As mentioned before, minority neighborhoods usually have a higher foreclosure rate, and in those neighborhoods housing price appreciation is much slower than in similar white neighborhoods. The interaction between lower housing price appreciation and higher foreclosure rates might cause the economic and housing situation in those neighborhoods to deteriorate. Therefore, for foreclosure-mitigation purposes, more intensive research needs to be done to confirm the existence of the relationship between foreclosure and racial composition, economic condition and housing price appreciation. Also, for foreclosed minority homeowners, the impaired credit quality will greatly affect their future application for new loans and therefore can widen the existing homeownership rate gap between white and minority homeowners; the result is more housing hardship for those people.

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In Laurias study (1998), he found that instead of white flight having a negative impact, mortgage foreclosure in New Orleans is a process of economic opportunity for African-Americans by allowing them to move into previously white-occupied houses that experienced foreclosure. The previous owners of those houses were usually employed in businesses that are greatly impacted by economic recession. His findings have contributed a great deal to the literature both theoretically and methodologically. He found that one of the most important social impacts of mortgage foreclosures is the associated racial transition and neighborhood change. Baxter and Lauria (2000) found that both economic changes and the prior racial composition of the neighborhoods cause the median income level to decrease; also, racial transition and loss or decrease of income increase foreclosure probabilities. Foreclosures negatively affect vacancy rates, racial composition and change, and tenure status of the neighborhoods. This, then, makes the neighborhoods experience even more hardship and transitions that further increase the foreclosure rate. Therefore, the cyclical nature between foreclosures, neighborhood change, racial and economic transitions will further segregate the housing market between a white population and Blacks or other under-represented minorities. Hence, Baxter and Lauria (2000) found that foreclosures serve as a strong mechanism to link economic shocks and the process of racial transition (Lauria, 1999). Mortgage foreclosures stimulated racial transition and the change of neighborhoods due to socio-economic factors such as racial composition, median income, housing prices and economic shocks. The research found that the strongest effect of racial transition associated with mortgage foreclosures usually happens in block groups whose residents

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have low to lowest income levels and a large proportion of and increasing Black population.

The Impact of Mortgage Foreclosure on Neighborhood Property Value Change and Other Housing Stock Characteristics Hypothetically speaking, neighborhoods with a high foreclosure rate over time will have depreciated housing prices, although the flipping of properties might happen with those properties which were sold at a discount in the foreclosure process. Due to a lack of literature and theory bases, research on this topic can be very challenging. It is well known that foreclosed properties are usually sold at a discounted price compared to other similar properties in the same or nearby neighborhoods (Carroll et. al., 1995; Forgey et. al. 1994), although the discount is very different controlling for some factors, such as location and common characteristics. However, there are controversies about whether foreclosed properties will provide arbitrage in the real estate market (Carroll et. al., 1995). Also, FHA properties and properties in their neighborhoods are usually sold at a higher discount rate compared to properties with conventional loans because of the adverse characteristics of those properties (Carroll et. al., 1995). Pennington-Cross (2003) found that properties with loans that foreclose early in their life were sold at the highest discount, and properties in a state requiring the judicial process of foreclosure are sold at a higher discount than in states that do not require the legal process. He also found that a more accurate appraisal of properties with low down payment loans leads to a lower discount in foreclosure resale. Recently, Immergluck and Smith (2005a, 2005b) conducted intensive research on the impact of foreclosure on neighborhood characteristics in Chicago. They found that 45

foreclosures on conventional, single-family houses have significant impact on property values in the adjacent area. Within a radius of an eighth of a mile around the foreclosed properties, the value of other properties was reduced by 0.9%. Based on their research, they estimated that there is about a $598 million loss in property value that is caused by 3,750 foreclosed properties. Therefore, the impact of foreclosure on property value is very significant. In their research they also found that high violent crime rates are often associated with neighborhoods where there are high foreclosure rates.

Major Problems in Neighborhood-Effects Research

Omitted Variables Omitted variables are primary concerns in neighborhood-effects studies (Dietz, 2002; Manski, 1993). Those variables usually deal with unobserved or not easily attainable attributes, preferences, and psychological aspects of the residents in a certain neighborhood. For example, a borrowers willingness to default or go through foreclosure on a house is usually not easily observed until they take the action. In many situations, borrowers characteristics at the time of default or foreclosure are not available. Also, the impact of real estate brokerage behaviors on foreclosure is not observable, and many times it is difficult to judge whether borrowers are forced into a mortgage that is beyond their ability to pay or willingly proceed because of financial illiteracy or eagerness to achieve the American Dream. The list of omitted variables in neighborhood-effects research is potentially endless.

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Simultaneity or Reverse Causality Reverse causality between individual and peer group behavior in neighborhoodeffects research is a common problem. Exploring the relationship between mortgage foreclosure and neighborhood characteristics and change will inevitably have problems with this issue because of the reverse causality between foreclosure and neighborhood characteristics and change.

Reflection Problem and Inferring Causality The reflection problem refers to the fact that the behavior of residents in a certain neighborhood or cohort is reflective and that each persons behavior affects everyone elses. Manski (2000) thinks that since the mean behavior of a group (neighborhood) is determined by the behavior of the group members (neighborhood residents). It is hard to tell whether the group behavior reveals the individual behavior or whether the group behavior is the aggregation of individual behaviors. He describes the phenomenon as a persons movement and the movement of his image in a mirror, which is simultaneous. Therefore he questions whether the group behavior is caused by the individual behavior or is simply the reflection of individual behavior. In neighborhood effects research inferring causality is an issue that we should be aware of. We state that neighborhood indicators and their changes are interactive with foreclosure rates, but it is difficult to tell whether the neighborhood indicators reveal individual householders characteristics, or the aggregated householders characteristics. Therefore it is difficult to tell whether it is the neighborhood or the individual characteristics are related to foreclosures. At the same time the foreclosure rate is a ratio

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of aggregated foreclosures in a neighborhood over the total owner-occupied housing units. So it is difficult to separate the impact of individual foreclosure on neighborhood from that of aggregated foreclosures. This issue is also related to the ecological fallacy of inferring individual behaviors because of relationships found for spatial units. Therefore, in this research there are several sets of issues around the idea of inferring causality. The first one is the use of aggregated or average data from the sample residents to infer to the characteristics of a neighborhood (census data at the block groups level). Another one is to use recorded foreclosed properties to infer the relationship of all foreclosures with neighborhood characteristics and change. The research tries to show that neighborhood characteristics and change are a cause of foreclosures, and foreclosures are a cause of neighborhood change. It is difficult to tell whether neighborhoods are the reflection or causes of foreclosures. Vise versa it is difficult to tell whether foreclosures are the reflection or causes of neighborhood change. The non-recursive inferring of causality thus requires very careful structuring of data sets as well as solving some technical issues associated with the regression models. Time-lagged panel data from different time periods will be used to separate the effects of neighborhoods on foreclosures from those of foreclosures on neighborhoods. discussed in later sections. Specialized regression-related techniques will be

Selection The selection problem refers to the fact that an individuals selection of a neighborhood depends on his or her individual characteristics. People may self-select into certain kinds of neighborhoods because of their personal characteristics rather than

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having their characteristics affected by the neighborhood. However, they may self-select into certain kinds of neighborhoods because of their characteristics and then also have those characteristics affected by the neighborhood. In addition, the households choice of neighborhood will be affected by the characteristics of the neighborhood and how they interact with the characteristics of the household. Therefore, in this research if we claim that foreclosures affect neighborhood change it means that an individuals selection of a neighborhood depends on foreclosures in that neighborhood, not only his or her own characteristics, because neighborhood change is related to that individuals

characteristics. So we have to assume that there are no selection problems in this research and peoples behavior depends not only on their individual characteristics but also on other exogenous factors, such as foreclosures.

Spatial Autocorrelation Spatial autocorrelation is a universal problem when geographic data, either physical or human, are involved in analysis. One significant example of spatial autocorrelation is that housing price is highly related to location, and houses adjacent to each other usually affect each other in terms of market price and value appreciation, assuming there are no other non-spatial factors involved such as jurisdiction limitations, speculation or policy issues. Each attribute correlates to not only the same attributes in a neighboring location but also to different attributes in that location. Foreclosed properties will have a negative impact on the property values of surrounding or adjacent properties (Immergluck, 2005a), so spatial autocorrelation exists. Spatial autocorrelation also helps to reduce the

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influence of omitted variables because spatial dependence among the errors is generally due to omitted variables (Bell and Bockstael, 2000; Pace et. al. 1998). Spatial regression is usually used instead of a general Ordinary Least Square (OLS) regression model in studies where spatial autocorrelation might affect the research results in a significant manner. model. This study will report results of a spatially lagged regression

Literature Summary and the Derivation of Research Questions

Many factors lead to mortgage default and foreclosure, and neighborhood characteristics are among the most important (Quercia and Stegman, 1992; Cotterman, 2002, 2003; HUD, 2004). However, few scholars have examined how neighborhood characteristics contribute to mortgage foreclosure (Cotterman, 2001; Lauria, 1998; Lauria and Baxter, 1999; Baxter and Lauria, 2000; Immergluck and Smith, 2005a, 2005b), and even fewer have incorporated many neighborhood variables into mortgage default models and foreclosure analysis. Some variables that theory tells us should be important (e.g., household income and mortgage payment amounts) have been found to have mixed effects on mortgage default (Quercia and Stegman, 1992). In addition, the

methodological problems in neighborhood-effects research call for statistical models which will resolve or reduce the effects of endogenous variables, omitted variables and reflection problems (Dietz, 2002). The research uses foreclosure data from Ohios two most populous counties to examine some of these previously omitted or understudied variables. In addition, I try to incorporate spatial analysis, especially spatial trend

analysis, spatial autocorrelation and spatial regression models, into the OLS model. A

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model correcting for heterscedasticity is also estimated. I then model the impact of foreclosure on neighborhood change using SUR. I also pay particular attention to each neighborhoods racial composition, economic level, housing prices and other housing stock characteristics as well as to the changes over time in those variables.

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CHAPTER 3

RESEARCH METHODOLOGY
Based on the research questions and related literature review, the research will test several hypotheses. These hypotheses will help answer some subsidiary questions associated with the first two primary ones.

Hypotheses
Hypothesis 1: The effect of neighborhood characteristics on mortgage foreclosure does not change randomly over time. For example, certain kinds of neighborhoods are likely to have higher or lower foreclosure rates. In his research on FHA loans, Cotterman (2000) found that mortgage foreclosure concentration at the neighborhood level changes randomly over time. This means that the geographical distribution of foreclosure rates is not fixed over time, which might mean that neighborhood characteristics and changes are not associated with foreclosure-rate changes. I will test that whether changing foreclosure rates over time are random because I believe there is some neighborhood-based mechanism pushing the change according to certain patterns. But if my hypothesis does not hold, further studies will be needed to understand the relationship between foreclosure and neighborhoods.

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Hypothesis 2a: Neighborhoods with slower housing value appreciation or negative appreciation rates have higher mortgage foreclosure rates, holding neighborhood income and racial composition constant. Housing value change is a very important factor affecting mortgage default tendencies. This is true because negative equity, which has a significant effect on mortgage default decisions (Quigley et. al., 1993), is largely determined by housing value changes in combination with loan characteristics (Case and Shiller, 1996). Research on housing price appreciation in low-income and/or minority neighborhoods (Cotterman, 2001) found that low price appreciation in these neighborhoods is an important factor leading to higher default rates. We do not yet know the causes of this correlation. Hypothesis 2b: Neighborhoods with high foreclosure rates experience slower housing value appreciation. This hypothesis will test whether mortgage foreclosure rates cause slower housing value appreciation or negative appreciation. If the hypothesis is supported, foreclosure prevention efforts might focus on reducing foreclosure concentration in neighborhoods. If it is not, the causal relationship between foreclosure rates and housing value appreciation is recursive, instead of non-recursive, and the model discussed in the previous chapter becomes simple.

Hypothesis 3a: Neighborhoods with minority concentrations and racially diverse neighborhoods have higher mortgage foreclosure rates, holding income constant. This study also will test whether racial composition of a neighborhood, holding income and other indicators constant, affects mortgage foreclosure rate.

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Hypothesis 3b: Neighborhoods with high foreclosure rates have large scale racial transitions. Lauria and Baxters research (1998, 1999, 2000) on New Orleans found that racial transition occurs mostly in neighborhoods with high foreclosure rates. My study will test whether this finding holds in two counties in Ohio as well. If it does, we need to consider issues of causality and what processes link racial transition and foreclosure rates.

Hypothesis 4a: Low-moderate income neighborhoods have higher mortgage foreclosure rates than middle-income and upper-income neighborhoods, holding racial composition constant. The purpose of this hypothesis is to test whether race is a key factor in mortgage foreclosure, or if it is only a factor when associated with certain income categories of neighborhoods. If controlling racial composition foreclosure rates correlate with income level of a neighborhood, we can conclude that income has an independent effect. Hypothesis 4b: Neighborhoods with high foreclosure rates also have declining median incomes. Lauria and Baxters research (1998, 1999, 2000) found that neighborhoods with high foreclosure rates have declining median incomes. But, they could not explain whether the declining median income is caused by rising foreclosure rates in those neighborhoods. So this study will test whether the findings hold in the two counties in Ohio and, if they do, explain how the mechanism works in this situation.

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Hypothesis 5: Neighborhoods with high foreclosure rates have a greater housing supply than housing demand with high vacancy rates and declining neighborhood quality. This hypothesis will test the relationship between changes in vacancy rates in a neighborhood and foreclosure rates.

Hypothesis 6: In counties with different macro economic situations, the interaction between neighborhood characteristics, changes, and residential mortgage foreclosure has different mechanics. Macro economic situations affect macro mortgage repayment behavior and the real estate market greatly. For two counties that have different economic situations and growth rates, the relationship between neighborhood characteristics and foreclosure should be different between them as well.

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Major Datasets Used in Foreclosure Research

Because of the complexity of default and foreclosure processes, there are some related datasets that have been used by scholars in default and foreclosure research. Each of them has its own strengths and weaknesses, and oftentimes two or more have to be combined in a study to help achieve research objectives.

1. The Mortgage Bankers Association Datasets The U.S. Mortgage Bankers Association (MBA) provides quarterly aggregated case counts for foreclosures (started) at the state level. The data usually start from the late 1970s and present the quarterly foreclosure rates for prime loans, sub prime loans, FHAinsured loans, VA- insured loans, and other types of loans. The Association also provides market-share data for different types of loans and the biggest vendors of those loans. MBA datasets are appropriate to explore the foreclosure status and trends of the whole U.S. When combined with other demographic, economic and legal data, the MBA datasets can be used to compare foreclosure patterns for the 50 states. Since the datasets also include longitude data, they can be used to run time-series analyses combined or not combined with other datasets. Their major weakness is that they contain no data below the state level.

2. Home Mortgage Disclosure Act Datasets The Home Mortgage Disclosure Act (HMDA), enacted in 1975, requires major financial institutions to provide data known as the HMDA data. HMDA data are administered and monitored by the Federal Financial Institutions Examination Council

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(FFIEC). FFIEC collects these data to assist in determining whether financial institutions are serving the housing needs of their communities, assist public officials in allocating public funds to attract private investment, and promote fair lending practices. HMDA data includes mortgage applicants and borrowers characteristics at the origination of the mortgage, including age, race, income, FICO credit score, and other information. If an application for a mortgage is rejected, the reason for the rejection has to be documented. HMDA data also include loan information at the origination of the mortgage. Some people have combined HMDA data with foreclosure filing data, Mortgage Loan Performance Data, and/or the HUD (U.S. Department of Housing and Urban Development) sub-prime lenders list to map the distribution of sub-prime loans and the distribution of foreclosure filings. These distributions are then compared to determine whether the two phenomena are correlated. Some have tried to model how mortgage default is related to borrower and loan characteristics. HMDA data have some weaknesses and limitations. As far as foreclosure research goes, since HMDA only captures borrower and loan characteristics at the origination of the mortgage, not when default has happened, such research cannot accurately measure what factors may be causing the default and foreclosure, except to predict the default risk of the borrowers.

3. Mortgage Loan Performance Data Mortgage loan performance data are mega datasets to trace the performance of individual loans. The datasets capture most of the sub-prime loans and many prime loans in the U.S. Loan Performance, Inc., a nationwide mortgage data provider, manages the

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datasets. Some scholars use these data to explore the performance of sub-prime loans since the datasets include most of the sub-prime loans in the U.S. Those datasets are also widely used by financial institutions in default risk analysis to help manage credit risk in mortgage lending. Loan Performance datasets are expensive; for example, the historical loan performance data for Ohio could cost over $30,000 and so are not often available for academic research. The data are displayed through a software platform, e.g., Loan Performance 3.0, or the company will retrieve necessary data for the clients for a price.

4. Foreclosure Filing Data Foreclosure filing datasets, which are usually created and managed by the local civic court, cannot be easily used in academic foreclosure analysis due to their limited information on the case and the format of the data. Most of the information is in documentation format and is not tabulated or computerized. These data could be useful in exploring factors contributing to default and foreclosure. But, since the foreclosure filing data describe cases at the beginning of the foreclosure process, the validity of using the data as a proxy for foreclosure is questionable, although it measures troubled loans which may continue through the foreclosure process. After lenders file lawsuits against the borrowers to start the foreclosure process, about two thirds of the borrowers successfully terminated the foreclosure process by avoiding Sheriffs auction sales.

5. Civic Real Estate Sales Data When the properties associated with the foreclosure cases are ordered for sale at a civic real estate sales auction, the Civic Court or the Court of Common Pleas will publish

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the notices and information about the properties at the local official legal newspaper, such as the Daily Reporter in Franklin County, Ohio. The Sheriffs Office of the local government, usually a county, keeps a property database for buyers to search these properties. This database usually only includes the addresses and the appraisal value of the property. Sometimes the status of the property, such as sold, or withdrawn, appears in the database. But there are some problems associated with those databases. The first is that the data mainly serve the buyers of or investors in the foreclosing properties. Therefore, the format of the database cannot be easily transformed for academic analysis. Second, if the databases include detailed addresses or parcel ID numbers, it is easy to geocode and then merge with other real property databases, such as Parcel or census data. However, many of those datasets only have legal descriptions of the properties, which are very difficult to geocode or merge with other datasets. The third problem is that those datasets usually do not include historical data (for example, the Franklin County Sheriffs Office only has the electronic data since 2002).

6. Other Commercial Foreclosure Data Properties with troubled loans have become very attractive to real estate investors, and the most attractive ones are those that an investor can buy before the foreclosure auction. This type of investment is often called a pre-foreclosure or foreclosure investment. Therefore, many commercial organizations provide lists of properties in foreclosure. For a real estate investor the list can be very useful, but for academic purposes those properties are not randomly selected and do not cover all or even most of

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the cases. They usually do not include historical data, either. Commercial data can be found from many carriers on the internet.

7. Sheriffs Deed-Transfer Data After a property is sold at the public auction most buyers will go to the Recorders Office or the Auditors Office to record the deed transfer. (In some counties the recording of the deed is voluntary while in others its mandatory. This depends solely on requirements imposed by the local legislature. But many buyers will record the deed in order to add security to the title). The biggest strength of using the deed-transfer data is that there are enough historical data on record to do analysis over time. One weakness is that if the recording process is not required by the county some buyers might not record the transfer. In these cases, the deed-transfer data cannot cover all properties sold in the Sheriffs sales. Another limitation is that a small number of properties at Sheriffs sales are sold because of tax delinquency, mechanics liens and other obligations. But the biggest drawback is the number of foreclosed properties that dont get to Sheriffs sales, and it is not a random process because the best investments (probably in the best neighborhoods) are purchased before this point. The purpose of this research is to explore the relationship between mortgage foreclosure and neighborhood characteristics and change. Selling a property at auction finishes the foreclosure process (except that, in some states, the previous owner has redemption rights within a certain time period after the transaction). We assume that those foreclosed properties, instead of those filed for a foreclosure but then withdrawn due to different reasons, might have a greater impact on neighborhoods. New foreclosure

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filings are just the beginning of the foreclosure process and using the filing data will yield biased results to answer the research questions. Therefore, the primary databases of the research are historical Sheriffs Sales data in the two research areas.

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Summary of Datasets Used in this Research

This study uses the following five sets of data: Cuyahoga County and Franklin County Sheriffs Deed Transfer Data (1997 2004) Cuyahoga County Sheriffs Deed Transfer Data (19831989) Cuyahoga County and Franklin County Property Parcel Data (2004, 2005) Census Block Group Data (19902000) Census Designated Place Data (19902000) TIGER street line GIS data. The Sheriffs Deed transfer data are retrieved from the deed record index that is managed by each countys Recorders Office. The data in Cuyahoga County starts in 1983. Franklin County records can be traced back to the early 1990s, but records before 1997 only include legal descriptions of the property, which are not possible to geocode when using the TIGER maps. Therefore, to compare data between the two counties, those cases foreclosed between 1997 and 2004 are used. The Sheriffs Deed transfer data were merged with property parcel data using the parcel ID number. Only sales of single-family homes were kept in the analysis because multifamily homes are often classified as commercial instead of residential properties. For Franklin County the parcel data is in GIS format; therefore, there was no need to geocode the Sheriffs Deeds data. But the property parcel data from Cuyahoga County are not in the GIS format; therefore, the merged data had to be geocoded using TIGER as base maps. In this process, any duplicated cases that might be caused by errors in recording or multiple foreclosures were eliminated.

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The geocoded datasets with GIS and parcel information were then spatially merged with census block-group and designated-place boundary files. After the combination there are a total of 11,844 cases in Franklin County and 12,353 cases in Cuyahoga County. These cases were aggregated based on block groups. In Cuyahoga County there are 1262 block groups and in Franklin County there are 883 block groups. The datasets have block group ID numbers by which those datasets can be merged with the census demographic, economic and housing data in 1990 and 2000. The census block group boundary files and census data have been unified for the years of 1990 and 2000. Therefore, there will not be any issues in terms of using the census data from two different years because of the difference in boundaries for certain block groups or census places. Inevitably, during the process of merging, geocoding, and retrieving data some cases are lost. Whether those lost cases will affect the research results remains unknown without further investigations. Although it is possible to test the difference of the data used in this research and the lost cases to see if they are different. But this research will leave the test to the future and assume that there is no significant difference between the lost cases and the cases used in this research. As stated before, the final datasets include 11,844 cases in Franklin County and 12,353 cases in Cuyahoga County. To derive the foreclosure rate, all accumulated foreclosure cases between 1997 and 2004 in each block group are divided by the total owner-occupied housing units in the same block group. Furthermore, in order to separate the neighborhood effects on foreclosures from the impact of foreclosure on neighborhood indicators, two panels of foreclosures are created. One is between 1983 and 1989 in Cuyahoga County, and the

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other is between 2001 and 2004. Foreclosure rates in those two time periods are derived in the same manner as those between 1997 and 2004. After the data are processed, the final datasets are used to analyze the pattern in each county separately. When a combined analysis is needed, the two datasets for the same time periods for the two counties will be merged.

Variable Selection and Description

Every neighborhood is a dynamic community that presents multi-faceted characteristics and changes in those characteristics. We want to include variables measuring the demographic structure, social characteristics and interaction, economic situation and stability, and housing attributes and values in each neighborhood and census place. There are corresponding physical characteristics and changes associated with the demographic, economic and social characteristics and changes, and variables are needed to capture those as well. Most of the selected variables are based on previous literature on the interactive relationship between neighborhood characteristics (indicators) and mortgage foreclosure. In neighborhood change theory, there are mainly four sets of variables that were captured by scholars to measure neighborhood quality (Elwakil, 1994); neighborhood-related, social-economic condition of the residents; external factors such as accessibility; and housing unit quality and quantity. But the classification by Elwakil (1994) is somewhat ambiguous, and some of the neighborhood-quality variables are correlated to each other, do not directly affect foreclosure, and are not in turn affected by foreclosure. Therefore, I use three categories to classify the variables in a clearer manner: demographic

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characteristics, economic characteristics and housing characteristics. Inevitably, these three categories are also correlated to each other, and that made the use of the SUR model more appealing than the OLS regression model. These models will be discussed later. The three categories include the characteristics in 1990, 2000, and the change variables between these two census years. The following is a detailed description of those variables.

Demographic Characteristics Demographic characteristics are highly related to the social and economic structure of a neighborhood. In the demographic/ecologic model of neighborhood change, the importance of the demographic push-pull mechanism is even more significant. The demographic structure of a neighborhood usually describes the population composition and includes the elements of gender, race, age, educational attainment, marital status and change, and household type as well as other information. Racial transition has been looked at closely not only in neighborhood change theory, but also in the research on neighborhood effects on foreclosure (Baxter and Lauria, 2000; Lauria and Baxter, 1999; Lauria, 1998; Cotterman, 2001). In mortgage default and foreclosure, marital status and change and household type are also important factors to consider since the shock of a divorce is usually considered a very important personal factor accompanying the income shock from divorce; thus, these factors affect the risk of default in mortgage repayment. In Immergluck and Smiths (2005a) research about the impact of mortgage foreclosure on violent crime rates, they used a male population between 14 and 24 years of age as a proxy because of this age groups relationship to crime. Krivo et. al. (1998) used female

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headship rate as one of the important indicators of neighborhood quality. Since female headship rate is also related to the income level of a household, this variable is also included in this study. There are some other factors that contribute to mortgage default and foreclosure, but they are not as important as those mentioned above.

Economic Characteristics Economic characteristics are always very important factors affecting mortgage foreclosure. A large group of literature (Guest, 1974; Vandel, 1981; Coulson and Bond, 1990; Galster and Mincy, 1993; Galster et. al., 1997; Carter et. al., 1998) has used income and social class as one of the major neighborhood indicators, and inevitably median household or family income is used in various neighborhood-effects studies. There are many factors affecting income and income stability, but unemployment is one of the important ones that can bring about direct income shock to a household. Poverty is another important indicator, and a population below the poverty line within a neighborhood will indicate the economic situation of the neighborhood. Income level is also related to a persons occupation. For a neighborhood in which more of the population in the labor force is employed in the service sector or other lower paying sectors, income level and stability will be affected significantly. Generally speaking, if a large percent of the population is employed in management or executive occupations, the income level will be higher than in neighborhoods with a large percent of other occupations, although the salary levels of management/executive occupations can be very different for different careers. Thus, those variables are used in this study to see whether and how they are related to foreclosure.

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Housing Characteristics As the literature review section has indicated, housing characteristics and attributes are important factors related to mortgage default and foreclosure. Housing tenure and homeownership rate, average housing cost burden, change in owner-occupied housing units, housing vacancy rate and the median value of owner-occupied homes are all very important factors related to mortgage default and foreclosure. This study looks at the relationship between foreclosure and single-family housing units; therefore,

homeownership rate in a neighborhood will be highly related to the foreclosures on those properties because only owned homes can be foreclosed. In the succession of a neighborhood some foreclosed single-family units will be transformed into rental complexes with multiple housing units in each one. A mortgage usually includes PITI principle, interest, tax, and insurance payments. In situations where there is a housing cost burden the borrowers may not have considered some of the costs and the potential appreciation of those costs, for example, the potential change in payment associated with ARM loans, GRM loans, loans with a tease rate, 3-to-1 buy-downs, balloon payments, and other seemingly attractive features. Many borrowers also are not aware that property taxation, utility payments, and housing maintenance are also potential costs associated with being a homeowner. The Bureau of Census defines the housing cost burden with a mortgage as follows: A household has a "housing cost burden" if it spends 30 percent or more of its income on housing costs. A household has a "severe housing cost burden" if it spends 50 percent or more of its income on housing. Owner housing costs consist of payments for mortgages, deeds of trust, contracts to purchase, or similar debts on the property; real estate taxes; fire, hazard, and flood insurance on the property; utilities; and fuels. Where applicable, owner costs also include monthly condominium fees. Household income is

67

the total pre-tax income of the householder and all other individuals at least 15 years old in the household. However, the housing cost burden in 1990 and 2000 is not comparable because the two years recorded the burden in different ways. Median owner costs with a mortgage are included in 1990, but median owner costs as a percentage of household income are included in 2000. Therefore, the 1990 variable is a dollar value but the 2000 variable is a percentage value. Simply dividing median household income by the median owner costs is not the most accurate proxy for the housing cost burden measured in 1990. Therefore, this research will only use the 2000 housing cost burden. Housing vacancy rates should be closely related to mortgage foreclosure since many foreclosed houses or houses going through foreclosure are vacant. In a neighborhood with a high foreclosure rate, the vacancy rate is assumed to be high in part because of the foreclosures. The high vacancy rate then decreases property values and neighborhood quality, thus resulting in more severe foreclosure problems. The change in the median value of owner-occupied housing units from 1990 to 2000 will provide the estimate for housing appreciation over the 10-year span. Housing value appreciation is closely related to mortgage default risk because the borrower is more likely to abandon the building and go through the foreclosure process when there is negative equity. Therefore, housing value change is highly associated with mortgage default and foreclosure, and high foreclosure rates will cause lower housing appreciation not only to the foreclosed properties, but also the properties adjacent to them (Immergluck and Smith, 2005a). Some other variables, for example, the percentage of owner-occupied housing units with a mortgage and the percentage of units with a second mortgage and/or home equity 68

loan, were also found to be related to mortgage default risk and foreclosure (Herzog and Earley, 1970; LaCour-Little, 2004). But the data about second mortgages and home equity loans are not comparable between 1990 and 2000 because the 1990 census does not include those two variables; therefore, they are not included in the analysis.

69

VARIABLE Neighborhood Characteristics and Change Demographic BLACK00 BLACK90 BLACK_D COLLEGEH00 COLLEGEH90 COLL_D DIVORCE00 DIVORCE90 DIVOR_D FEMALEKID00 FEMALEKID90 FEMALE_D TOTALHH00 TOTALHH90 HH_D MINORITY00 MINORITY90 MINORITY_D MALE1424_00 Economic INCOME00 INCOME90 INCOME_D UNEMPLOY00 UNEMPLOY90 UNEMPLOY_D POVERTY00 POVERTY90 POVER_D MNGMT00 MNGMT90 MNGMY_D

DESCRIPTION

% black population in 2000 % black population in 1990 Change in % black population (19902000) % population (>25 years old) with college or higher education in 2000 % population (>25 years old) with college or higher education in 1990 Change in % population (>25 years old) with college or higher education (1990 2000) % divorced population (>16 years old) in 2000 % divorced population (>16 years old) in 1990 Change in % divorced population (>16 years old) (19902000) % female-led households with children <18 years old in 2000 % female-led households with children <18 years old in 1990 Change in % female-led households with children (19902000) Total households in 2000 Total households in 1990 % change of total households (19902000) % minority population in 2000 % minority population in 1990 Change in % minority population (19902000) % male population between the age of 14 and 24 in 2000 Median household income in 2000 Median household income in 1990 % change in median housing income (19902000) Unemployment rate in 2000 Unemployment rate in 1990 Change in unemployment rate (19902000) % population below the poverty line in 2000 % population below the poverty line in 1990 Change in % population below the poverty line (19902000) % labor force working in management and executive occupation in 2000 % labor force working in management and executive occupation in 1990 Change in % labor force working in management and executive occupation (1990 2000) Continued

Table 3.1: List of Selected Variables

70

Table 3.1 continued

SERVICE00 SERVICE90 SERV_D Housing HCOSTM00 TENURE00 TENURE90 TENURE_D OWNER00 OWNER90 OWNER_D VACANCY00 VACANCY90 VACAN_D VALUE00 VALUE90 VALUE_D MORTGAGE00 MORTGAGE90 SMORTGAGE00 YEARS00 YEARS90 % labor force working in service occupation in 2000 % labor force working in service occupation in 1990 Change in % labor force working in service occupation (19902000) Median owner costs as a percentage of income for housing units with a mortgage in 2000 Homeownership rate in 2000 Homeownership rate in 1990 Change in homeownership rate (19902000) Total owner-occupied housing units in 2000 Total owner-occupied housing units in 1990 % change in total owner-occupied housing units (19902000) The vacancy rate among all housing units in 2000 The vacancy rate among all housing units in 1990 Change in housing vacancy rate (19902000) Median housing value in 2000 Median housing value in 1990 % change in median housing value (19902000) % owner-occupied housing units with a mortgage in 2000 % owner-occupied housing units with a mortgage in 1990 % owner-occupied housing units with a second mortgage in 2000 Median years housing units built in 2000 Median years housing units built in 1990

Change in Census Place Characteristics Demographic PBLACK_D PCOLL_D PDIVOR_D PFEMALE_D PHH_D Economic PINC_D PUNEMPLOY_D PPOVER_D PMNGMT_D PSERV_D % change in median household income (19902000) Change in unemployment rate (19902000) Change in % population below the poverty line (19902000) Change in % labor force working in management and executive occupation (1990 2000) Change in % labor force working in service occupation (19902000) Continued Change in % black population (19902000) Change in % population (>25 years old) with college or higher education (1990 2000) Change in % divorced population (>16 years old) (19902000) Change in % female-led households with children (19902000) % change of total households (19902000)

71

Table 3.1 continued

Housing PTENURE_D POWNER_D PVACAN_D PVALUE_D

Change in homeownership rate (19902000) % change in total owner-occupied housing units (19902000) Change in housing vacancy rate (19902000) % change in median housing value (19902000)

72

Research Methodology
Simple Descriptive Analysis After data cleansing, simple descriptive analysis will be used to measure how the foreclosure cases are distributed over time and place in the two study counties. Geocoding, geographic aggregation, frequency analysis, univariate analysis, bivariate analysis, and t-tests will be used in this step of the research. The geocoding process is the vehicle to find out how those foreclosure cases are distributed. Each case is geocoded and layered with block groups, the census designated place, and/or school districts, which provided a convenient way to compare the spatial pattern in those eight years. All the cases in the eight years are then aggregated at the block-group level and divided by the total number of owner-occupied housing units in the same block group to determine a measure of the foreclosure rate. The foreclosure rate will be classified into five categories and then displayed in a thematic map.

Spatial Analysis When a variables spatial distribution is not random and the values of a variable at a set of locations depend on values of the same variable at other locations, spatial autocorrelation exists and will affect the OLS regression results (Odland, 1988). A typical example in housing market research is housing price. The housing price in a neighborhood will affect or be affected by the housing price in adjacent neighborhoods. When we run hedonic housing price models, spatial autocorrelation should be tested. If the autocorrelation is significant, the spatial lag or error terms should be added to the hedonic housing price model (Basu and Tribodeau, 1998).

73

In spatial autocorrelation, there are several key statistics that can measure the extent of the autocorrelation. The first is the weighting matrix that creates a matrix to measure the relative locations of pairs of places on the map. For example, in this study the block group (a polygon) will be used as the research unit, and when one block group shares a common boundary with another block group, the weight equals 1; otherwise it is 0. In some geostatistic software, such as Geoda (which is used in this research), the weight matrix can easily be calculated based on the relations of polygons or points on the map. Weight matrices can be constructed based on contiguity from polygon (shape) boundary files or calculated from the distance between points. For most weight matrices, Geoda uses the row-standardized form such that the summation of the weight values in a row equals 1. Therefore, the weight matrix can be expressed as (Anselin, 2005):
Wij = C ij

C
j

, where Cij = 1 when i and j share common boundaries, and Cij = 0

ij

otherwise After we derive the weight matrix, the spatial autocovariance can be calculated based on the following formula:

ij

( xi x)( x j x)

But in measuring spatial autocorrelation, another statistic, Morans I, is more useful than spatial autocovariance. Morans I is calculated by standardizing the spatial autocovariance and is classified as either Global Morans I or Local Morans I, depending on whether a single measure of spatial autocorrelation of an attribute is about the whole region (Global autocorrelation) or the impact of each unit in the region is on nearby units (Local autocorrelation). 74

The Global Morans I can be expressed as:

I=

ij

W ( x (x
ij

i i

x)( x j x) x) 2
N

In a row-standardized format of the weighting matrix the term The Local Morans I can be expressed as:
I i = z i Wij z j
j N

equals 1.

ij

where zi and zj are standardized values of attributes in the region of i and j where they are neighbors defined according to the weight matrix. When exploring the spatial autocorrelation of one attribute, univariate Morans I is used, but when exploring the spatial autocorrelation relationship between multiple variables, for example, to explore whether the foreclosure rate in one neighborhood would affect the housing price in adjacent neighborhoods, multivariate Morans I will be used.

Spatial Regression

Spatial dependency is a very common phenomenon for geographically distributed attributes such as those in housing markets. Therefore, when we are dealing with spatial datasets we initially assume that there is spatial autocorrelation of certain attributes or a dependency of some attributes on others in neighboring areas. These assumptions make the research much more complicated, but due to the development of geostatistic methodology and software incorporating spatial autocorrelation into traditional OLS regression, the research is feasible.
75

The format of a general OLS model can be expressed as:

Y = X +
where Y is the matrix of values for the dependent variable(s), X is the matrix of values for the independent variables, and is the error-term matrix. When considering the effect of spatial autocorrelation, the formula can be revised to:

Y = X + W +
where we notice that is the spatial autoregressive coefficient, W is the spatial weighting matrix, is the spatial error term and is another error term. This transformed OLS regression, which contains a spatial autocorrelation error term, is usually called spatial error regression. Another format of spatial regression is based on spatial lags and is called spatial lag regression. The general format of the spatial lag regression model is:

Y = X + Wy +
where the Wy is a spatially lagged variable of the dependent variable Y

When considering which regression models are appropriate to measure the datasets (OLS, spatial error, or spatial lag), there are some rules that a researcher can follow, although these rules are not absolute when making a decision (Anselin, 2005). The process starts with the Lagrange Multiplier (LM)-error2 and LM-lag test3. If none of the tests are significant, then one can choose the OLS model. If only one is significant, then we should use spatial lag or error models to do further tests. If the LM-error test is significant, then we should choose the spatial error model; otherwise, we should choose the spatial lag model. 76

If both the LM-error and LM-lag tests are significant, then we look at the Robust LM-error diagnostic. If the Robust LM-error4 is significant, we choose the spatial error model, and if the Robust LM-lag is significant, we choose the spatial lag model. See Figure 3.1 for a summary of this process. In this research, when measuring neighborhood effects on foreclosures the OLS model will be tested in both counties. If the effect is different in each county, then the analysis will run the OLS models separately for the counties. If the OLS spatial dependence diagnosis finds significant spatial dependence spatial error or lag models will be used to estimate the neighborhood effects. The rule of choosing between the error or lag models is based on the chart in Figure 3.1.

77

Figure 3.1: Spatial Regression Decision Process (Anselin, 2005: 217)

78

Seemingly Unrelated Regression (SUR)

Seemingly unrelated regression (SUR), also called joint generalized least squares (JGLS) or Zellner estimation, is a system of OLS for multiple equations. Like OLS, SUR assumes that all the regressors are independent variables, but SUR uses the correlations among the errors in different equations to improve the regression estimates. The SUR method requires an initial OLS regression to compute residuals. The OLS residuals are used to estimate the cross-equation covariance matrix. SUR may improve the efficiency of parameter estimates when there is contemporaneous correlation of errors across equations. Under two sets of circumstances, SUR parameter estimates are the same as those produced by OLS: when there is no contemporaneous correlation of errors across equations (the estimate of contemporaneous correlation matrix is diagonal); and when the independent variables are the same across equations. Theoretically, SUR parameter estimates will always be at least as efficient as OLS in large samples, provided that the equations are correctly specified. However, in small samples the need to estimate the covariance matrix from the OLS residuals increases the sampling variability of the SUR estimates, and this effect can cause SUR to be less efficient than OLS. If the sample size is small and the across-model correlations are small, then OLS is preferred to SUR. The consequences of specification error are also more serious with SUR than with OLS.

79

SUR Parameter Estimation Procedure

In a SUR regression system, all parameters in the equations are estimated simultaneously by applying Aitkens Generalized Least Squares (GLS) to the whole system of equations (Zellner, 1962). The derivation of the cross-model covariance is based on the residuals from the equation-by-equation OLS. The general format of the equation system can be expressed as:
y1 X 1 y 0 2 y3 = 0 M L yM 0 0 1 e1 0 2 e2 0 3 + e3 L M M X M M e M

0 X2 0 L 0

0 0

L L

X3 L L L 0 L

or simply as

y = X + e
In this research, y is a 141 matrix of all the change variables (endogenous variables) at the neighborhood level in Cuyahoga County. In each equation there are different independent variables (exogenous variables) that consist of the neighborhood characteristics variables in 1990 and the change variables in census place characteristics. The selection of the independent variables in each equation is based on the level of correlation coefficients between those variables and foreclosure rates. In some equations the independent variables are the subset of the independent variables in several other equations. However, in using the SUR this research will make the following assumptions: 1. The spatial effects are ignored although there might be spatial autocorrelation between the variables in neighboring block groups. 80

2. The covariance of the error terms between and within the equations is not equal to zero. Then the variance-covariance matrix is assumed to be of the form
11 12 21 22 E (ee) = 31 32 L L M 1 M 2

13 23 33 M3
L

IT = IT = L L L MM

15 L 25 L 35
L

where IT is a unit matrix of order TT and =E(etet) for t = 1, 2, , T, and , = 1, 2, , M. In temporal cross-section regressions, t represents time. In the original equation, system variances and covariances are constant from period to period and there is an absence of any auto or serial correlation of the error terms. In a regression related to geographic problems, t stands for the tth geographic region. The original equation system is the form such that there is correlation between error terms or dependent variables relating to a particular region but not to different regions. Error variances and covariances are assumed to be constant from region to region (the error terms of each equation have a zero mean). Then the GLS estimator is given by
= ( X 1 X ) 1 X 1 y = [X ( 1 I T ) X ] X ( 1 I T ) y
1

In constructing the estimator we need the inverse of -1, which is given by:
11 I 12 I 21 I 22 I = ... ... M1 M2 I I ... 1M I ... 2 M I ... ... ... MM I

81

Therefore the parameter estimator of the coefficient vector is as follows:

11 12 X 1 X 2 1 X 1 X 1 21 X 2 X 1 22 X 2 X 2 = 2= ... ... ... M 1 X X M 2 X X M M 1 2 M

... ... ... ...

M 1 X 1 y 1 =1 1M X 1 X M M 2 X y 2 2 M X 2 X M =1 ... ... M MM X M X M M X M y =1

Then, the variance-covariance matrix of the estimator is:

11 X X 12 X 1 X 2 1 1 21 22 X 2 X 2 V ( ) = X 2 X 1 ... ... M1 M2 X M X 1 X M X 2

... ... ... ...

X1 X M M 1 X 2 X M ... MM XM XM
1M

System Weighted R2 and System Weighted Mean Square Error

In SUR the goodness of fit of the system of equations is measured by the System Weighted R2 and System Weighted Mean Square Error (MSE). The System Weighted R2 is computed as follows:

R2 = Y' W R (X'X)-1 R' W Y / Y' W Y

In this equation the matrix X'X is R'W R, and W is the projection matrix of the instruments:

W = S 1 Z ( Z Z ) 1 Z

The matrix Z is the instrument set, R is the regressor set, and S is the estimated cross-model covariance matrix. 82

The system weighted MSE is computed as follows:

MSE = [1/tdf] ( Y' W Y - Y' W R (X'X)-1 R' W Y )

In this equation, tdf is the sum of the error degrees of freedom for the equations in the system.

83

CHAPTER 4

DESCRIPTIVE AND SPATIAL ANALYSIS

Judicial Foreclosure Process and Sheriffs Deed Transfer Data

When borrowers are in default, usually defined as being three months behind in mortgage repayments, lenders in some states can file a foreclosure lawsuit in the local civic court and initiate a judicial foreclosure process. In other states, lenders file a notice of default and initiate a trustees sale of the properties without going through the judicial system. This is called non-judicial foreclosure. In some states both judicial and nonjudicial systems exist. In Ohio, only judicial foreclosure is allowed. There are several critical procedures in the process of judicial foreclosure. When the mortgage lender detects a loan default, they will notify the loan borrower about the default and possible plans to restore a normal status. If the borrower does not respond, or the work-out plans or loan modification plans fail, the lender will file a civil lawsuit against the borrower (mortgagor) to claim the payoff of the loan balance. This is the start of the foreclosure process. If at this stage the borrower repays the loan, sells the property and pays off the loan, or files for bankruptcy the case will be finalized. If none of these occur, the property, as collateral for the mortgage, will be put into a civic sale. These sales are usually conducted by the Sheriffs Office of each county, which holds an

84

auction on a regular basis. If the loan balance is fully paid, or the borrower announces bankruptcy, or the property is bought by private investors prior the auction, the property will be withdrawn from the sales process. Otherwise, the property will go to the Sheriffs Sale. If no bid is made on a property the lenders will usually take the title of the property to sell in the future; this kind of property is called a Real Estate Owned (REO) property. Properties sold at the Sheriffs sales will be recorded at the county Recorders Office as Sheriffs Deeds. The process of judicial foreclosure and the handling of the properties before and after foreclosure is summarized in Figure 4.1. Because of the complex nature of the process when conducting foreclosure research, it is difficult to decide what datasets to use. The choice largely depends on the objectives of the research. If we want to know what factors lead to foreclosures, foreclosure filing datasets or mortgage loan performance datasets can be used. But if we want to explore the impact of the foreclosure process (from foreclosure start to finish) on neighborhood characteristics and change, it is appropriate to use the Sheriffs Deeds transfer data since those properties are foreclosed and probably have the biggest impact on neighborhoods.

85

Mortgage Default

Workout, payment brought back to current

Lenders file lawsuit to the court (Foreclosure Started)

Some properties withdrawn

Court Trial

No

Borrower Loses

Yes

Foreclosure Terminated

Order of civic sales

Withdrawn (borrower bankruptcy, properties sold prior to auction, etc.)

Public Auction

Sheriffs Deeds (Foreclosure Finished)

REO

Reauction

Figure 4.1: Judicial Foreclosure Process 86

Ohios Foreclosure Situation

The U.S. residential mortgage foreclosure rate has slightly increased over time (see Figure 4.2). But in Ohio, the residential mortgage foreclosure rate has increased rapidly since 1995. Since 1999, the rate has been above the U.S. average and became the highest in all states in 2003, with a rate of 2.9%, compared to 1.2% nationally (MBA, 2004). According to the annual court summary of the Supreme Court of Ohio, from 2001 to 2002 new foreclosure filings increased by 27.3%, and they increased another 3.3% from 2002 to 2003 (Supreme Court of Ohio, 2002, 2003). Foreclosure filings in 2003 were double the number in 1998.

70,000 New Foreclosure Filings 60,000 50,000 40,000 30,000 20,000 10,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year

Figure 4.2: New Foreclosure Filings in Ohio (19902005)

87

After mapping rate increases for new foreclosure filings, I found that the increased rates are unevenly distributed among the 88 counties in Ohio. Economic patterns may explain the foreclosure distribution pattern, but the topic needs further research. Previous studies found that a weak economy and predatory lending significantly contributed to the high foreclosure rate in Ohio (Schiller et. al., 2004; Bellamy, 2002). Those studies recommended that the State take measures to enact anti-predatory lending legislations. But none of the studies could identify the exact reasons for the high foreclosure rate because of small samples, third-party surveys (surveys to Sheriffs Offices), and lack of advanced statistical analysis. The geographic distribution of the growth rate of foreclosure filings does not show strong patterns among the counties, and the majority of counties have an annual increase of more than 10% (see Figure 4.4). In the period between 1996 and 2004, there were more counties with a high annual rate increase in foreclosure filings. Among the 88 counties, Cuyahoga County and Franklin County have the highest number of new foreclosure filings in 2004 (see Table 4.1).

88

Figure 4.3: Change of Foreclosures Started in Ohio (19842003)

Source: Mortgage Bankers Association of America, 2004

County Cuyahoga Franklin Hamilton Montgomery Lucas Summit Stark Butler Lorain Mahoning

Number of Foreclosures Filed 9,751 5,940 4,528 4,002 2,766 3,358 2,129 1,952 1,510 1,367

Table 4.1: Number of New Foreclosures Filed in 2004 by County (descending by the number of filings)

89

Williams Defiance Paulding

Fulton

Lucas Ottawa Wood Sandusky Seneca Erie Huron Cuyahoga Lorain Medina

Lake Geauga

Ashtabula

Henry

Trumbull Summit Portage Mahoning

Putnam Van Wert Allen

Hancock Wyandot Crawford Hardin Ashland Richland Wayne Holmes Knox Union Champaign Delaware Licking Madison Franklin Fairfield Muskingum Perry Morgan Hocking Ross Vinton Highland Athens Washington Noble Coshocton Guernsey Tuscarawas Harrison Stark

Columbiana Carroll Jefferson

Mercer

Auglaize Shelby Logan

Marion

Morrow

Darke Miami

Belmont

Clark Preble Montgomery Greene

Pickaway Fayette

Monroe

Butler Ham ilton

Warren

Clinton

Clermont Brown Adam s

Pike Scioto

Jackson Gallia Lawrence

Meigs

Growth Rate from 1990 to 1996, % -70 - -35 -35 - 0 0 - 100 100 - 200 200 - 360

Williams Defiance Paulding

Fulton

Lucas Ottawa Wood Sandusky Seneca Erie Huron Cuyahoga Lorain Medina

Lake Geauga

Ashtabula

Henry

Trumbull Summit Portage Mahoning

Putnam Van Wert Allen

Hancock Wyandot Crawford Hardin Ashland Richland Wayne Holmes Knox Union Champaign Delaware Licking Madison Franklin Fairfield Muskingum Perry Morgan Hocking Ross Vinton Highland Athens Washington Noble Coshocton Guernsey Tuscarawas Harrison Stark

Columbiana Carroll Jefferson

Mercer

Auglaize Shelby Logan

Marion

Morrow

Darke Miami

Belmont

Clark Preble Montgomery Greene

Pickaway Fayette

Monroe

Butler Ham ilton

Warren

Clinton

Clermont Brown Adam s

Pike Scioto

Jackson Gallia Lawrence

Meigs

Growth Rate from 1996 to 2004, % 0 - 100 100 - 300 300 - 500 500 - 800 800 - 1100

Figure 4.4: Average Annual Growth Rate of New foreclosure Filings by County

90

Research Area and Geographic Definition of Neighborhood

Research Area

Initially, I hoped to explore how mortgage foreclosure and neighborhood characteristics interact in the three biggest counties in Ohio: Cuyahoga, Franklin and Hamilton. However, because of data availability issues, Hamilton County had to be excluded from the research. The other two major counties should provide a good study comparison because they have quite different characteristics (see Table 4.2).

New Foreclosure Filings of the Research Area

In Franklin County new foreclosure filings have risen continuously since 1990, but the rise has been steep and rapid since 1995 (see Figure 4.5). In 1990 there were 2,533 filings and by 2004 this had risen to 5,940. New filings doubled during those 15 years. New foreclosure filing data prior to 1990 was not aggregated by the Supreme Court of Ohio, therefore a longer term trend cannot be analyzed. The potential reasons for the rapid increases in new filings since 1995 are not clearly known, although Schiller (2003, 2004) stated that the unemployment rate cannot explain the trend because between 1995 and 2000 the economy was booming. It is encouraging to see that since 2002 the filings have begun to drop slightly. It will be very interesting to follow the trend in future years to try to connect macro economic trends to new foreclosure filings. Foreclosure has been a serious issue in Cuyahoga County since 1990. In 1990 new foreclosure filings numbered 5,595, and in 2004 the new filings jumped to 9,751. Over those 15 years there were 84,672 total filings. Franklin County has seen slight decreases in the last three years, but in Cuyahoga County foreclosure filings dropped slightly in

91

2003 but rose again in 2004. Therefore, Cuyahoga is a county with serious foreclosure problems.

New Foreclosure Filings

12,000

10,000

8,000

6,000

4,000

2,000 Cuyahoga 0
95 96 98 99 02 03 91 92 90 93 94 97 00 20 01 19 19 19 19 19 19 19 19 19 19 20 20 20 20 04

Franklin

Ye ar

Figure 4.5 New Foreclosure Filings in Cuyahoga County and Franklin County (1990 2004)

General and Social Characteristics of the Research Area in 2000

Franklin County is in Central Ohio and the capital city of the state, Columbus, makes up the major part of the county (see Figure 4.6). The total population in Franklin County is about 1.07 million and 75.5% are Whites. Compared to Cuyahoga County, the population in Franklin County is much younger with more education. In Franklin County the median age of the population is 32.5 and in Cuyahoga County the median age is 37.3. 92

In Franklin County 85.7% of the population are high school graduates (or higher), compared to 81.6% in Cuyahoga County. Cuyahoga County is located at the northeastern corner of the state and Cleveland makes up the major part of the county (see Figure 4.6). The total population in Cuyahoga County is 1.39 million and 67.4% are Whites. Therefore, Cuyahoga County has a larger percentage of a minority population. There are 438,778 total housing units in Franklin County and 56.9% are owneroccupied. Female headship rate, defined as the percentage of female householders without a husband present, is 13.0%. There are 616,903 total housing units in Cuyahoga County and 63.2% are owneroccupied. Female headship rate is 15.7%.

Economic Characteristics of the Research Area

In Franklin County 70.7% of the population over 16 are in the labor force, and in Cuyahoga County the ratio is 62.5%. In 2000 the unemployment rate was 3.0% in Franklin County and 3.9% in Cuyahoga County. The 2005 unemployment rate was 6.1% for Cuyahoga County and 5.3% for Franklin County. This increase in unemployment may have contributed to overall increases in foreclosures. Median household income in Franklin County is $42,734 (in 2004 inflation-adjusted dollars); in Cuyahoga County it is $39,168. And, in Franklin County there are fewer families that are under the poverty line (8.2%, compared to 10.2% in Cuyahoga County). Generally speaking, the economic situation in Franklin County is better than that in Cuyahoga County with a higher household income, lower poverty rate, and a lower

93

unemployment rate. This probably relates to the occupational structure of the two counties. In Cuyahoga County manufacturing is one of the dominant industries, and industry structural change in recent years has forced a significant amount of population into unemployment or underemployment.

Housing Characteristics of the Research Area

Although the two counties have different numbers of the total housing units, their housing characteristics are very similar. The median value of owner-occupied housing units in Franklin County is $116,200, compared to $113,800 in Cuyahoga County. The median housing costs for owners with a mortgage is $1,077 in Franklin County compared to $1,057 in Cuyahoga County. Also, there is a larger percentage of rental units in Franklin County (43.1%) than in Cuyahoga County (36.8%).

Summary

Compared to Franklin County, Cuyahoga County has an older population with less education. The countys population has a larger percentage of minorities, a lower median household income, a higher unemployment rate, and a higher percentage population below the poverty line. There are more owner-occupied housing units in Cuyahoga County. Manufacturing is one of the major sectors in Cuyahoga County, while in Franklin County financial sectors, public administration, and information technology hold important positions in the economy. These characteristics would lead us to expect a worse foreclosure problem in Cuyahoga County than in Franklin County.

94

[
Cleveland

Columbus

Figure 4.6: Research Area: Cuyahoga County and Franklin County, Ohio

95

2000 Franklin County Number General Characteristics Total population Median age (years) White Black or African American American Indian and Alaska Native Asian Native Hawaiian and Other Pacific Islander Some other race Two or more races Average household size Female householder, no husband present With own children under 18 years old Average family size Total housing units Owner-occupied housing units Renter-occupied housing units Vacant housing units Social Characteristics High school graduate or higher Bachelor's degree or higher Male, Now married, except separated (>= 15 years old) Female, Now married, except separated (>=15 years old) Economic Characteristics In labor force (>= 16 years old) Unemployed Median household income (in 2004 inflation-adjusted dollars) Median family income (in 2004 inflation-adjusted dollars) Per capita income (in 2004 inflation-adjusted dollars) Families below poverty level Female householder, no husband present Female householder, no husband present, with children < 18 Individuals below poverty level 584,391 24,594 42,734 53,905 23,059 21,742 13,787 12,421 121,843 70.70 3.00 8.20 24.30 30.30 11.60 676,874 41,778 39,168 49,559 22,272 36,535 179,372 62.50 3.90 10.30 13.10 Continued 579,896 215,180 201,802 201,354 85.70 31.80 50.10 45.90 764,186 235,413 261,433 261,741 81.60 25.10 51.40 44.10 1,068,978 32.5 806,851 191,196 2,899 32,784 466 10,992 23,790 2.39 57,195 36,260 3.03 438,778 249,633 189,145 32,238 75.50 17.90 0.30 3.10 0.00 1.00 2.20 13.00 8.30 93.20 56.90 43.10 6.80 1,393,978 37.3 938,863 382,634 2,529 25,245 338 20,962 23,407 2.39 89,793 51,100 3.06 616,903 360,980 210,477 45,446 67.40 27.40 0.20 1.80 0.00 1.50 1.70 15.70 8.90 63.20 36.80 7.40 % Cuyahoga County Number %

Table 4.2: Selected Characteristics of the Two Counties 96

Table 4.2 Continued

Sales and office occupations Farming, fishing, and forestry occupations Construction, extraction, and maintenance occupations Production, transportation, and material-moving occupations

167,418 472 36,533 66,742

29.90 0.10 6.50 11.90

181,884 606 42,211 94,237

28.70 0.10 6.70 14.90

Industry Agriculture, forestry, fishing and hunting, and mining Construction Manufacturing Wholesale trade Retail trade Transportation and warehousing, and utilities Information Finance, insurance, real estate, and rental and leasing Professional, scientific, management, administrative, and waste management services Educational, health and social services Arts, entertainment, recreation, accommodation and food services Other services (except public administration) Public administration Class of Worker Private wage and salary workers Government workers Self-employed workers in own non-incorporated business Unpaid family workers 445,498 86,647 26,072 912 79.70 15.50 4.70 0.20 523,380 81,138 28,671 1,230 82.50 12.80 4.50 0.20 1,229 28,664 51,907 21,861 74,001 29,537 22,167 57,468 61,573 107,669 46,648 23,888 32,517 0.20 5.10 9.30 3.90 13.20 5.30 4.00 10.30 11.00 19.30 8.30 4.30 5.80 901 28,952 102,279 24,570 68,699 30,779 17,821 54,773 64,340 137,562 48,796 28,090 26,857 0.10 4.60 16.10 3.90 10.80 4.90 2.80 8.60 10.10 21.70 7.70 4.40 4.20

Housing Characteristics Median value of owner-occupied homes ($) Median owner costs with a mortgage ($) Median owner costs without mortgages ($) 116,200 1,077 326 113,800 1,057 346 -

Source: www.census.gov

97

Geographic Definition of Neighborhood

The definition and delineation of a neighborhood is always controversial, although this issue has received broad attention (e.g., Dietz, 2002). Oftentimes neighborhoods are defined based on physical and social elements of a residential area (Schwirian, 1983). But because of data limitations, especially when using aggregate data, many studies simply use census boundaries, tracts or block groups as the unit of neighborhood. Census tracts are much bigger than block groups; therefore, in order to create a more accurate representation of neighborhoods, this research is conducted at the block group level.

98

Data Description for Each County Franklin County, Ohio

General Description

As mentioned previously, only about one third of the new foreclosure filings end up with being sold at the Sheriffs sales. Table 4.3 indicates the number of cases of new foreclosure filings, the number of terminated foreclosure cases, total Sheriffs Deeds (SD) and the percentage of those Sheriffs Deeds among new filings and terminated cases in each year (please refer to Figure 4.1 for the judicial foreclosure process). We notice that Sheriffs Deeds account for about 37% of the total new filings or terminated cases from 1997 to 2004, and in recent years the percentage has increased greatly. The reason why the increase becomes rapid since 2003 needs further investigation. Therefore the sudden jump of the percentage Sheriffs Deeds as new filings might make the estimation results of the regression models (Chapter 5) biased due to omitted variables. It would be difficult to fix the problem due to the unknown or immeasurable omitted variables.

Year New Foreclosure Filings Terminated Cases (TC) Total SD SD as % of New Filings SD as % TC

1997 2,533 2,529 626 24.71 24.75

1998 2,992 2,994 1,092 36.50 36.47

1999 3,468 3,404 1,115 32.15 32.76

2000 3,832 3,896 1,505 39.27 38.63

2001 5,077 4,837 1,660 32.70 34.32

2002 6,104 6,014 2,106 34.50 35.02

2003 6,072 6,628 2,546 41.93 38.41

2004 5,940 6,871 3,228 54.34 46.98

All Years 36,018 37,173 13,878 38.53 37.33

Table 4.3: New Foreclosure Filings, Terminated Foreclosure Cases and Sheriffs Deeds (19972004, Franklin County)

99

Among the total of 13,878 Sheriffs Deeds over the time period, there are 476 duplicated records that were either foreclosed multiple times or recorded by mistakes. These duplicated cases are eliminated from the research. After eliminating duplicated cases, the Sheriffs Deed data are merged with property parcel data. There are 11,844 single-family properties in the final dataset (see Table 4.4).

Year Cases

1997 551

1998 989

1999 966

2000 1,308

2001 1,423

2002 1,771

2003 2,140

2004 2,696

Total 11,844

Table 4.4: The Total Single-family Sheriffs Deeds (19972004, Franklin County)

Those 11,844 parcels are aggregated at the block group level, then the aggregated cases are divided by total owner-occupied housing units to derive a foreclosure rate in each block group. There are 883 block groups in Franklin County and 137 block groups have missing values. The foreclosure rate in most of the block groups is lower than 15.00%. But more than 100 block groups have a foreclosure rate higher than 15%. Some block groups (137) have a foreclosure rate of 0, which means that either the block groups dont have foreclosed properties or the foreclosed properties are not included in the research due to data collecting and processing errors. Excluding missing values, the average foreclosure rate measured by the accumulated Sheriffs Deeds during 1997 to 2004 is 7.64% in 746 block groups, with a standard deviation of 10.55% (the lowest value is 0.18%; the highest value is 73.08%). Most of the block groups have a foreclosure rate between 0 and 15.00% in the eight years studied (see Figure 4.7).

100

% Block Groups

35.00

30.00

25.00

20.00

15.00

10.00

5.00

0.00 >0 1% >15% >515% >15 25% >25 50% >50 75%

Foreclosure Rate (1997-2004)

Figure 4.7: Franklin County Foreclosure Rate Distribution at the Block Group Level (19972004)

We notice that 58.44% block groups have a foreclosure rate lower than 5.00%, and 85.38% have a foreclosure rate lower than 15.00%. The rest, 14.62%, are the block groups with a high foreclosure rate ranging from 15.00% to 75.00%. When considering median household income in a neighborhood we found that foreclosures in this dataset generally concentrate in neighborhoods with low to moderate income. High income neighborhoods have very low foreclosure rates. The lower the median income, the higher the foreclosure rate will be. Looking at detailed spatial patterns of the deed transfers, we found that the cases are highly clustered in certain areas, especially distressed inner-city areas, and the clustering does not change over time, although in recent years those cases began to scatter to 101

wealthier suburbs (see Figure 4.8). This pattern is not surprising since households in these distressed inner-city areas suffer more during economic downturns. On the other hand, those houses might be less attractive to pre-foreclosure investors and, therefore, many of them have to go to the Sheriffs sales auction. So the dataset may over represent them.

102

Sheriffs Deeds (1997)

Sheriffs Deeds (1998)

Sheriffs Deeds (1999)

Sheriffs Deeds (2000)

Continued

Figure 4.8: Spatial Distribution of Sheriffs Deeds in Franklin County (19972004)

103

Figure 4.8 Continued

Sheriffs Deeds (2001)

Sheriffs Deeds (2002)

Sheriffs Deeds (2003)

Sheriffs Deeds (2004)

104

Figure 4.9: Total Residential Sheriffs Deeds in Franklin County (19972004)

105

Sheriff's Sales Deed Transfer Records in 1997 Sheriff's Sales Deed Transfer Records in 2004 blockgroup

Figure 4.10: Comparison between the 1997 and 2004 of the Distribution of Sheriffs Deeds in Franklin County

106

107
Foreclosure Rate 0.0000 - 0.0100 0.0101 - 0.0500 0.0501 - 0.1500 0.1501 - 0.2500 0.2501 - 0.5000 0.5001 - 0.7500

Figure 4.11: Foreclosure Rates by Block Groups in Franklin County (19972004)

Spatial Autocorrelation Analysis

Univariate and multivariate spatial autocorrelation are the two most common analysis methods in spatial autocorrelation analysis. Univariate spatial autocorrelation explores whether a variable is spatially autocorrelated with the same variable in adjacent neighborhoods. Multivariate analysis explores the autocorrelation between two or more different variables in adjacent neighborhoods. In this analysis, several sets of variables are considered to explore whether spatial autocorrelation exists. The first set is the univariate autocorrelation of foreclosure rates; the other sets are the bivariate autocorrelation between foreclosure rate and median housing value of owner-occupied housing units, percentage minority population, housing vacancy rate, and homeownership rate. Among those bivariate autocorrelation analyses, the mutual relationship between foreclosure rate and the selected neighborhood indicators are explored. For example, the autocorrelation test starts with the effect of the median housing value in 2000 on foreclosure rate between 2001 and 2004, and then the effect of foreclosure rate between 1997 and 2000 on median housing value in 2000. All the variables in this section are standardized. All the univariate and bivariate autocorrelation tests are based on global and local autocorrelation analyses. The significance of using local autocorrelation analysis is to determine the relationship at the individual block group level; thus, local autocorrelation analysis maps can be generated to illustrate those relationships.

Connectivity of Block Groups in Franklin County

Connectivity of different block groups is the basis of calculating weighting matrixes. The connectivity of block groups is illustrated in Figure 4.12. From left to right, the

108

different colors in the histogram denote the number of neighboring block groups for any given block group. For example, dark blue means that a block group is neighboring with one block group, lighter blue means that a block group is neighboring with two other block groups, and so forth. Combining these numbers with the number associated with each column in the histogram, we found that there is only one block group that has one neighboring block group and 14 block groups with two neighboring block groups. There are 234 block groups that are adjacent to five block groups. Most of the block groups have three to eight neighboring block groups.

Figure 4.12: Connectivity of Block Groups in Franklin County

109

Global Spatial Autocorrelation

Foreclosure Rate
The spatial autocorrelation of foreclosure rates (19972004) in different neighborhoods is significant with a Morans Index (I) of 0.5763. This means that foreclosure rates are autocorrelated with the foreclosure rates in neighboring block groups. Therefore, the spatial distribution of foreclosure rate is not random but is highly clustered. Looking at the autocorrelation of foreclosure rates between 1997 and 2000, we found that the Morans I is 0.4927, while between 2001 and 2004 it is 0.5359. This means that after 2000 foreclosure rates have become more clustered.

Foreclosure Rate and Median Housing Value

Looking at the relations between median housing value in 2000 and foreclosure rate between 2001 and 2004, we found that these variables are negatively autocorrelated (Morans I = -0.3134). This means that median housing value in one neighborhood is negatively autocorrelated with foreclosure rate in neighboring block groups. Similar patterns exist when investigating how foreclosure rates between 1997 and 2000 is autocorrelated with median housing value in 2000 (Morans I = -0.2918). These simple relationships between foreclosure rate and median housing value indicate that these two variables are not only closely related to each other, but they have a spatial relationship as well.

110

Foreclosure Rate and Percentage Minority Households

Contrary to the relatioonship between foreclosure and median housing value, the relationship between foreclosure rate and racial composition of neighboring block groups are positive, both for the correlation between racial composition and foreclosure rate (2001 2004) (Morans I = 0.4603) and the correlation between foreclosure rate (1997 2000) on racial composition (Morans I = 0.4440). This means that racial composition in 2000 does are auto correlated with foreclosure rate between 2001 and 2004 in neighboring block groups, and foreclosure rate between 1997 and 2000 is autocorrelated with racial composition in 2000 in neighboring block groups.

Foreclosure Rate and Housing Vacancy Rate

When looking at both the correlation between housing vacancy rate and foreclosure rate between 2001 and 2004 (Morans I = 0.4078) and the correlation between foreclosure (19972000) and housing vacancy rate (Morans I = 0.4103), we found that the relationships are positive.

Foreclosure Rate and Homeownership Rate

The autocorrelation between foreclosure rate and homeownership rate is not very significant because Morans I is only slightly close to -0.15, for both the correlation between homeownership rate in 2000 and foreclosure rate (20012004) and the correlation between foreclosure rate (19972000) and homeownership rate in 2000.

111

Local Spatial Autocorrelation

Local spatial autocorrelation explores the relationship between block groups in terms of a certain variable (univariate), such as foreclosure rate, or the relations between two variables (bivariate). The analysis of local spatial autocorrelation of foreclosure rate in Franklin County shows that a high-high spatial autocorrelation exists in the inner-city neighborhoods with low income and a large percentage of minority population, for example, Franklinton, Olde Town East, and Weinland Park. Those neighborhoods have high foreclosure rates and are surrounded by ones with a high foreclosure rate. Some higher-end neighborhoods that are adjacent to the low income ones, such as Victorian Village, Italian Village, and German Village, present a low-high autocorrelation. Most of the northern part of the county has a low-low autocorrelation. The autocorrelation is not significant in southern areas. The only high-low autocorrelation in the northern suburbs of metropolitan Columbus appears in two block groups in Dublin and Worthington. Therefore, the neighborhoods with a significant local Morans I are either located in inner-city low income neighborhoods (high-high autocorrelation), inner-city median to high income neighborhoods (low-high autocorrelation), or suburban median to high income neighborhoods (low-low autocorrelation). The southern part of the County has mixedincome neighborhoods and the local Morans I is not significant.

112

Figure 4.13: Map of Foreclosure Rate Local Spatial Autocorrelation in Franklin County (19972004)

113

Temporal Change in Selected Neighborhood Variables

From 1990 to 2000, Franklin County experienced rapid changes in some neighborhood characteristics. Generally speaking, the most significant changes were an increased percentage of minority population and thus a decreased percentage of white population, increased housing cost burden, and increased total housing units. The countywide change and the change by different levels of foreclosure rate are summarized in the following sections.

Demographic Characteristics

For the entire county, the black population increased by 3.92% points and the minority population in general increased by 8.03% points. Thus, the white population decreased by 8.00% points. The county is more diverse than ever, and the outflow of the white population continues to be a significant phenomenon. However, the most significant increase of minority population and decrease of white population is concentrated in the neighborhoods with a foreclosure rate of 515% (see Table 4.5).

Economic Characteristics

It is interesting to note that from 1990 to 2000 the unemployment rate decreased by 0.90% points, and for those block groups with observations the decrease is even bigger (1.30% points). The population employed in management occupations increased dramatically by 20.22% points, and the biggest increase is in those neighborhoods with the lowest foreclosure rate. The population employed in service occupations increased by 2.55% points, but there is no obvious patterns observed at different levels of foreclosure

114

rate. The change in occupation structure and unemployment rate and their relationship with the foreclosure rate indicates that, although the unemployment rate decreased between 1990 and 2000, neighborhoods with lower-paid populations see a higher foreclosure rate. However, the relationship between service occupation and foreclosure rate is important, unlike that between management occupation and foreclosure rate. The median household income increased by $2,400 (2000 constant value), and the housing value of owner occupied housing units increased by $14,930 (2000 constant value). The most significant increase in the median household income and housing value is in those neighborhoods with a low foreclosure rate (lower than 1%) (see Table 4.5).

Housing Characteristics

The countywide housing vacancy rate increased by 0.60% points from 1990 to 2000. The vacancy rate is closely related to the foreclosure rate, the higher the foreclosure rate the higher the vacancy rate. In neighborhoods with the lowest foreclosure rate the vacancy rate decreased by 0.80% points. Generally speaking, the homeownership rate in the county increased by 2.81% points and the percentage of housing units with a mortgage increased by 3.56% points. There is no significant pattern observed at different levels of foreclosure rate for these two indicators (see Table 4.5).

115

Variable

Missing or 0

>0 1%

>1 5%

>5 15%

>15 25%

>25 50%

>50 75%

General (excl. missing obs: 743)

General (all block groups: 883)

Demographic Characteristics Total Number of Households Percentage Black Population Percentage Minority Population Percentage White Population Percentage Population Divorced (>16) Percentage Population with College and Higher Education Unemployment Rate Percentage Population in Service Occupation Percentage Population in Management Occupation +23.33% +2.49%** +8.85%*** -8.80%*** +0.14% +517.66% +1.47%*** +4.92%*** -4.90%*** +1.88%*** +53.00%* +4.32%*** +7.50%*** -7.50%*** +2.29%*** +63.16%+ +6.54%*** +11.03%*** -11.00%*** +2.22%*** -7.50%*** +3.09%* +7.23%*** -7.20%*** +1.84%+ -5.00%* +3.48%+ 7.79%*** -7.80%*** +0.30% +2.31% +4.02% +5.31% -5.30% -4.00% -26.70%* +3.51%*** +7.13%*** -8.60%*** +1.56%*** +126.3%+ +3.92%*** +8.03%*** -8.00%*** +1.67%***

+1.75%

+4.89%***

+5.86%***

+5.99%***

+3.20%*

+5.04%**

+7.31%

+4.75%***

+4.90%***

116

Economic Characteristics -0.50% +2.79%*** +0.06% +1.87%*** -0.60%** +3.12%*** -1.60%*** +3.30%*** -2.20%* -0.90% -2.10% +2.27% -1.20% -1.50% -1.30%*** +1.97%*** -0.90%*** +2.55%***

+25.02%***

+32.79%***

+20.43%***

+12.15%***

+10.94%***

+10.62%***

+7.79%*

+18.39%***

+20.22%***

Continued

Table 4.5: Change in Neighborhood Variables from 1990 to 2000 by Groups of Foreclosure Rate in Franklin County

Table 4.5 Continued

Percentage Population under the Poverty Level Median Household Income5

+2.35%* -$281.4

+0.90%** +$5,727.1***

+0.83%* +$2,483.2***

-0.30% +$1,598.3**

-3.00%+ +$1,468.6+

-4.60%* +$2,289.9*

-10.50%** +$5,834*

-0.80% +$2,101.1***

+0.18% +$2,399.9**

Housing Characteristics Vacancy Rate Homeownership Rate Percentage Housing Units with a Mortgage Median Housing Value (owneroccupied)6 -0.60% +0.02% +15.79%*** +$14,726* -0.80%* +6.21%*** +2.55%+ +$24,105*** +0.20% +2.43%*** +2.95%* +$15,500*** +1.59%*** +3.23%*** +2.33% +$9,092.1*** +3.00%*** +3.12%* -4.90%+ +$8,968.6*** +3.33%*** +1.29% +0.11% +$12,777*** +3.95% -6.50% +2.05% +$15,153+ +0.47%*** +2.45%*** +0.46%** +$12,677*** +0.60%*** +2.81%*** +3.56%*** +$14,930**

117

*** 0.001 significant level

**

0.01 significant level

0.05 significant level

0.10 significant level

Cuyahoga County, Ohio

General Description

In terms of Sheriffs Deeds, the Cuyahoga County Recorders Office provides the most complete records of Sheriffs sales data among those counties I examined. There are more than 30 years of historical data on Sheriffs Deeds. Since 1983 parcel IDs have been incorporated into the index file, which can be used as a 21-year time series record of Sheriffs sales data.
Sherif f 's Deeds 3000

2500

2000

1500

1000

500

0 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Ye ar

Figure 4.14: Total Sheriffs Deeds in Cuyahoga County (19652004) The 21-year span is shown in Figure 4.14 for reference. However, to compare the two counties this research uses those sales between 1997 and 2004. Over those eight years, there were 54,584 total new foreclosure filings and 16,705 recorded Sheriffs 118

Deeds in Cuyahoga County. The percentage of Sheriffs Deeds to new filings and terminations is relatively low at 27.48%. In Franklin County this percentage is slightly higher. The percentage has been decreasing since 1997. Further investigations need to be done to explore why the recorded deeds account for such a low percentage of either total cases of new filings or terminations.

Year New Foreclosure Filings Terminated Cases (TC) Total SD SD as % New Filings SD as % TC

1997 3,989 4,092 1,503 37.68 36.73

1998 4,925 5,287 1,904 38.66 36.01

1999 5,387 5,597 1,929 35.81 34.46

2000 5,900 6,217 1,995 33.81 32.09

2001 6,959 7,857 2,201 31.63 28.01

2002 8,987 10,001 2,180 24.26 21.80

2003 8,686 10,185 2,327 26.79 22.85

2004 9,751 11,550 2,666 27.34 23.08

All Years 54,584 60,786 16,705 30.60 27.48

Table 4.6: Sheriffs Deeds as a Percentage of Total New Filings and Total Foreclosure Case Terminations in Cuyahoga County (19972004)

There were 16,705 Sheriffs Deeds between 1997 and 2004. After eliminating cases with multiple records (619) there are 16,086 cases left. After merging the extracted dataset with the County parcel data in 2004, there are 13,894 residential properties in the dataset. The number of properties in each year is shown in Table 4.7. As with Franklin County, Sheriffs Deeds records in Cuyahoga County capture only part of the foreclosure data.

119

Year Cases

1997 1,164

1998 1,480

1999 1,512

2000 1,672

2001 1,866

2002 1,860

2003 2,011

2004 2,329

Total 13,894

Table 4.7: Total Available Residential Sheriffs Deeds in Cuyahoga County (19972004)

When geocoding the 13,864 total residential Sheriffs Deeds, 13,096 (94.46%) of them can be matched to their physical street address on the map with a score higher than 80. There are 683 cases that can be matched with a score between 0 and 80, and the other 85 cases could not be geocoded at all due to missing housing parcel IDs, addresses, or the timing lag of the reference base maps from TIGER. Franklin County already has a countywide geocoded parcel map from the Auditors Office, so the geocoding process is not needed for that county. The next step is to merge the observations with the census data at the block group level in 1990 and 2000 using the uniformed block group boundary shape files. There are 1,262 block groups in Cuyahoga County in 2000, among which 1,156 have Sheriffs Deeds observations. Excluding missing values, the average foreclosure rate measured by the accumulated Sheriffs Deeds during 1997 to 2004 is 6.49% in 1,149 block groups, with a standard deviation of 7.93% (the lowest value is 0.13%; the highest value is 66.67%). Among 1262 block groups, 113 have missing values or a 0 percent foreclosure rate. The majority of the block groups (87.30% of the 1149 block groups with observations) have a foreclosure rate lower than 15%. Only a slight percentage (3.22%) has a foreclosure rate higher than 25% (see Figure 4.15). When considering the effect of 120

median household income on the distribution of foreclosure rates among those different block groups, I found that higher income neighborhoods have lower foreclosure rates. Most of the foreclosures are in neighborhoods with an income range of $20,000$80,000. This pattern is very similar to that in Franklin County.

% Block Groups

35.00

30.00

25.00

20.00

15.00

10.00

5.00

0.00 >01% >15% >515% >1525% >2550% >5075% Fore closure Rate (1997-2004)

Figure 4.15: Cuyahoga County Foreclosure Rate Distribution at the Block Group Level (19972004)

121

Sheriffs Deeds (1997)

Sheriffs Deeds (1998)

122

Sheriffs Deeds (1999)

Sheriffs Deeds (2000)

Continued

Figure 4.16: Spatial Distribution of Sheriffs Deeds in Cuyahoga County (19972004)

Figure 4.16 Continued

Sheriffs Deeds (2001)

Sheriffs Deeds (2002)

123
Sheriffs Deeds (2003) Sheriffs Deeds (2004)

124

Figure 4.17: Total Residential Sheriffs Deeds in Cuyahoga County (19972004)

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125

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Sheriff's Sales Deed Transfer Records in 1997 Sheriff's Sales Deed Transfer Records in 2004 Cuyahoga County Block Group Boundary

Figure 4.18: Comparison between the 1997 and 2004 Distribution of Sheriffs Deed Transfer in Cuyahoga County

Foreclosure Rate 0.0013 - 0.0100 0.0101 - 0.0500 0.0501 - 0.1500 0.1501 - 0.2500 0.2501 - 0.5000 0.5001 - 0.7500

126

Figure 4.19: Foreclosure Rates by Block Groups in Cuyahoga County (19972004)

Foreclosures in 19831989

In order to create necessary time lags when exploring how foreclosures are related to neighborhood change, Sheriffs Deeds in 19831989 in Cuyahoga County are used. There were 9,185 Sheriffs Deeds during this time period. After getting rid of the duplicated cases there are 8,900 deeds left. Those properties were then merged with 1988 Cuyahoga County parcel data7. There are 7,872 residential properties. After geocoding there left 7,412 valid cases (460 addresses could not be geocoded, thus could not merge with the census data). Then those cases are aggregated at block group level, merged with the census block and place data, and divided by 1990 owner-occupied housing units in a block group to derive foreclosure rates. The aggregated foreclosure rate in 19831989 in Cuyahoga County is 3.67% (including those block groups with 0 foreclosures) based on 1221 block groups. Forty-one block groups have missing values. The highest foreclosure rate is 59.02%. The standard deviation of foreclosure rates is 5.50%. Figure 4.20 is the detailed map of the distribution of foreclosure rates at the block group level in Cuyahoga County in the time period.

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Foreclosure Rate
0.0000 - 0.0100 0.0101 - 0.0500 0.0501 - 0.1500 0.1501 - 0.2500 0.2501 - 0.5000 0.5001 - 0.7500

128

Figure 4.20: Foreclosure Rates by Block Groups in Cuyahoga County (1983-1989)

Spatial Autocorrelation Analysis

As with Franklin County, both global and local spatial autocorrelation are analyzed for Cuyahoga County. Univariate and multivariate autocorrelation are analyzed to explore whether the foreclosure rate in one neighborhood is autocorrelated with the foreclosure rate in adjacent neighborhoods, and whether the foreclosure rate in one neighborhood is autocorrelated with other neighborhood indicators in adjacent neighborhoods.

Connectivity of Block Groups in Cuyahoga County

In Cuyahoga County, most of the block groups are neighboring three to eight other block groups. There are 350 block groups that have five neighboring block groups. Only a few block groups have only one and two adjacent block groups; and only a few have more than 10 adjacent block groups. The weighting matrix is derived based on the connectivity of block groups and thus is used as the basis for further spatial regression analysis.

129

Figure 4.21: Connectivity of Block Groups in Cuyahoga County

Global Spatial Autocorrelation

Foreclosure Rate
The spatial autocorrelation of foreclosure rates in different neighborhoods is significant with a Morans I of 0.5588. This means that foreclosure rate is autocorrelated with the foreclosure rate in neighboring block groups. Therefore, the spatial distribution of foreclosure rates is not random but is highly clustered. Similar patterns show in the foreclosure rates between 1997 and 2000 (Morans I = 0.4339), and between 2001 and 2004 (Morans I = 0.5647). This means that foreclosures become more clustered after 2000.

Foreclosure Rate and Median Housing Value

Looking at the relationship between median housing value in 1990 and foreclosure rate between 1997 and 2004, we found that these variables are negatively autocorrelated 130

(Morans I = -0.3714). This means that median housing value in one neighborhood is negatively autocorrelated with foreclosure rate in neighboring block groups. Similar patterns exist when investigating how foreclosure rate between 1997 and 2004 is autocorrelated with median housing value in 2000 (Morans I = -0.3068). These simple relationships between foreclosure rate and median housing value indicate that those two variables are not only closely related to each other but also have a spatial relationship. Median housing value is autocorrelated with foreclosure rate and vise versa; foreclosure rate is autocorrelated with median housing value in adjacent neighborhoods.

Foreclosure Rate and Percentage Minority Population

Contrary to the relationships between foreclosure and median housing value, the relationships between foreclosure rate and racial composition of neighboring block groups are positive, both for the correlation between racial composition and foreclosure rate (20012004) (Morans I = 0.5752) and the correlation between foreclosure rate (19972000) and racial composition (Morans I = 0.5211). This means that the 1990 racial transition is autocorrelated with foreclosure rate between 1997 and 2004 in neighboring block groups, and foreclosure rate between 1997 and 2004 is autocorrelated with racial composition in 2000 in neighboring block groups.

Foreclosure Rate and Housing Vacancy Rate

When looking at both the correlation between housing vacancy rate and foreclosure rate between 2001 and 2004 (Morans I = 0.4170) and the correlation between

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foreclosure rate (19972000) on housing vacancy rate (Morans I = 0.3621), we found that the relationships are positive.

Foreclosure Rate and Homeownership Rate

Unlike in Franklin County, the autocorrelation between foreclosure rate and homeownership rate is negatively significant, looking either at the correlation between homeownership rate in 2000 and foreclosure rate (20012004) (Morans I = -0.3570) or the correlation between foreclosure rate (19972000) and homeownership rate in 2000 (Morans I = 0.3024).

Local Spatial Autocorrelation

Local spatial autocorrelation explores the relationship between block groups in terms of a specific variable, such as foreclosure rate. The analysis of local spatial autocorrelation of foreclosure rate in Cuyahoga County shows that high-high spatial autocorrelation exists in the inner-city neighborhoods with low income and a large percentage minority population (see Figure 4.22). Those neighborhoods have high foreclosure values and are surrounded by those with high foreclosure rate. Some higher end neighborhoods that are adjacent to the low income ones present a low-high autocorrelation. Most of the outlying suburban sections of the county have a low-low autocorrelation. There are only a few scattered block groups with a high-low autocorrelation. The autocorrelation is not significant in the inner suburban areas. Therefore, the neighborhoods with a significant local Morans I are located in inner-city, low income neighborhoods (high-high autocorrelation), inner median to high income

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neighborhoods (low-high autocorrelation), or outlying suburban median to high income neighborhoods (low-low autocorrelation).

133

134

Figure 4.22: Map of Foreclosure Rate Local Spatial Autocorrelation in Cuyahoga County (19972004)

Temporal Change in Selected Neighborhood Variables

Generally speaking, the pattern of change in neighborhood variables in Cuyahoga County is very similar to that in Franklin County. The percentage of black and minority population is increasing and the percentage of white population is decreasing. The population is more educated than in 1990. The housing vacancy rate has increased and the housing cost burden for those with a mortgage has increased dramatically (see Table 4.8).

Demographic Characteristics

Unlike Franklin County, the total number of households decreased slightly (0.42%) for Cuyahoga County. The higher the neighborhood foreclosure rate the higher the decrease in household formations. Neighborhoods with increased number of total households are those with a relatively low foreclosure rate (less than 1%). All other types of neighborhoods experienced loss of households. There is more increase in black population and less increase in overall percentage minority population than in Franklin County. This might mean that the County is not as attractive to all minorities as Franklin County, while it is more attractive to black population. The biggest increase of black and minority populations concentrate on those neighborhoods with a foreclosure rate of 515%. The percentage of white population has decreased by 8.30% points, which is similar to the decrease in Franklin County. The biggest decrease in white population is observed in the neighborhoods with foreclosure rates of 550%.

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Compared to 1990, the divorced population increased by 1.18% points, but there is no significant pattern observed at different levels of foreclosure rate. In most block groups the education level of the residents has increased; for the entire county the increase is 7.05% points for the population with college and higher education. The only neighborhoods with a decrease in educational attainment are those several with the highest foreclosure rate (5075%).

Economic Characteristics

The unemployment rate in Cuyahoga County decreased by 1.90% points compared to that in 1990. As with Franklin County, the percentage population employed in a management occupation is highly related to foreclosure rate, where the higher the foreclosure rate the lower the increase in percentage population in management occupations. The percentage population employed in service occupations increased slightly (by 1.77% points). The median household income increased $1,545.6 (2000 constant value), which is much lower than the increase in Franklin County.

Housing Characteristics

The increase in the median value of owner-occupied housing units is about $16,363. The housing vacancy rate increased by 0.66% points, and the pattern is not significant when considering its relationship with foreclosure rate. The homeownership rate increased by 2.36% points. Compared to Franklin County, the percentage increase of housing units with a mortgage is much larger at 8.36% points (It is 3.56% points for Franklin County). 136

Variable

Missing or 0

>0 1%

>1 5%

>5 15%

>15 25%

>25 50%

>50 75%

General (excl. missing obs: 1149)

General (all block groups:1262)

Demographic Characteristics Total number of Households Percentage Black Population Percentage Minority Population Percentage White Population Percentage Population Divorced (>16 years old) Percentage Population with College or Higher Education Economic Characteristics Unemployment Rate Percentage Population in Service Occupation Percentage Population in Management Occupation -2.90% +0.45%** 23.63%*** -0.80%** +1.15%*** +24.68%*** -1.40%*** +1.26%*** +20.66%*** -4.10%*** +1.71%*** +12.77%*** -3.10% -0.80% +9.67%*** -10.70% +0.03%** +9.11%*** -7.40% -38.90% -3.10%* -1.90%*** +1.67%*** +18.77%*** -1.90%*** +1.77%*** +19.32%*** -15.40% -1.60% 0.11%** -6.70%** -2.60% +3.45%*** +6.46%*** 0.74%*** +2.62%*** -3.70%*** +1.99%*** +7.05%*** -0.9% +3.89%*** +6.94%*** -8.80%*** +1.66%*** +6.99%*** -4.90%** +6.99%*** +10.13%*** -13.60%*** 0** +6.44%*** -11.80%*** +4.51%*** +6.56%*** -13.40%*** 0* +5.64%*** -17.10%** -2.50% -0.20%* -10.20%* -2.80% +2.30%** -32.00%* -4.40% -2.60% -2.00% -9.50% -10.20% -0.40% +4.45%*** +7.17%*** -8.60%*** +1.32%*** +7.16%*** -0.40%* +4.17%*** +6.85%*** -8.30%*** +1.18%*** +7.05%***

137

Continued

Table 4.8: Change of Selected Neighborhood Variables by Groups of Foreclosure Rate in Cuyahoga County (19902000)

Table 4.8 Continued

Percentage Population under the Poverty Level Median Household Income8 Housing Characteristics Vacancy Rate Homeownership Rate Percentage Housing Units with a Mortgage Median Housing Value (owner-occupied)9

-4.50% -$428.80*

+0.12%** +$543.40**

+0.59%*** +$1,656.1***

-2.70%** +$1,147.50***

-4.00% +$133.39**

-7.60% -$1,073

-19.20% -$14,036

-0.50% +$1,529.7***

-0.60% +$1,545.6***

-2.70% -2.40% +1.39%** -$4,472

+0.29%*** 1.67%*** +2.95%*** +$15,940***

+0.10%** +1.87%*** +8.38%*** +$17,166***

+0.49%*** +4.12%*** +9.85%*** +$15,356***

+1.55%*** -0.30%* +8.03%*** +$14.147***

+1.24%** -5.20% -7.90% +$18,858

-12.10% -22.70% -44.70% -$4,845

+0.77%*** +2.55%*** +8.45%*** +$17,611***

+0.66%*** +2.36%*** +8.36%*** +$16,363***

138

*** 0.001 significant level

**

0.01 significant level

0.05 significant level

0.10 significant level

Conclusions
Simple statistical and spatial analysis shows that in both counties new foreclosure filings and the foreclosure rate measured in this study have increased dramatically since the mid 1990s. Foreclosures have concentrated in low to moderate income and inner-city neighborhoods, although suburban areas have seen some increases in recent years. In both counties foreclosures become a broader county-wide issue over time. Among the new foreclosure filings there are only about a quarter to a third that finished the foreclosure process. The reason why many of those new filings did not terminate as foreclosed properties remains unknown. The economic situation of the two counties is different with Franklin County having a stronger economy and a younger and better educated population. Cuyahoga County has a higher homeownership rate than in Franklin County. When aggregating data and considering all block groups, the residential foreclosure rate from 1997 to 2004 in Franklin County is 6.47% and in Cuyahoga County is 6.49%. Block groups with foreclosures are usually those with a median income between $20,000 and $80,000. The study found that the educational levels of the population in both counties have increased greatly, but those neighborhoods with the highest foreclosure rate (5075%) show decreases in educational attainment. One of the significant findings is that in both counties the percentage of the white population decreased by about 8% between 1990 and 2000. The biggest increase of minority population occured in those neighborhoods with foreclosure rates in the range of 515%. When considering the effect of occupation on foreclosures, the research found that the percentage population in management and executive jobs negatively relates to the

139

foreclosure rate. The neighborhood unemployment rate is not significantly related to foreclosures in either county. The housing vacancy rate has been found to be positively related to the foreclosure rate. The pace of real income increase does not match the increase in housing value, leaving more people vulnerable to foreclosures. Spatial autocorrelation shows that foreclosures clustered in both counties. Foreclosures in one block group are autocorrelated with foreclosures in neighboring block groups. Foreclosures are positively autocorrelated with percentage minority population and housing vacancy rate in neighboring block groups. Foreclosures are negatively autocorrelated with median housing value of owner-occupied housing units in neighboring block groups. In Franklin County foreclosures and homeownership rate is not autocorrelated, but in Cuyahoga County the two are significantly autocorrelated. All those findings indicate that foreclosures and some neighborhood characteristics are autocorrelated with each other in neighboring block groups.

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CHAPTER 5

THE INTERACTION BETWEEN RESIDENTIAL MORTGAGE FORECLOSURE, NEIGHBORHOOD CHARACTERISTICS, AND NEIGHBORHOOD CHANGE
In order to separate the effects of neighborhood characteristics and change on foreclosure from the impact of foreclosure on neighborhood change, this research divides foreclosures in the study areas into two time periods, the first one is between 1983 and 1989 for Cuyahoga County only10, and the second one is between 2001 and 2004 for both counties. Census data from 1990 and 2000 are used to define neighborhood characteristics and neighborhood change variables. I hypothesize that foreclosures in 19831989 will have an impact on neighborhood change from 1990 to 2000, and neighborhood characteristics and change between 1990 and 2000 will affect foreclosures between 2001 and 2004.

County Franklin Cuyahoga

Panel 20012004 19831989 20012004

# Block Groups 880 1221 1262

Mean 4.27% 3.67% 3.38%

Min. 0 0 0

Std. Dev. 57.14% 6.72% Max. 59.02% 5.50% 37.50% 4.37%

Table 5.1: Foreclosure Rate Characteristics for Franklin and Cuyahoga Counties

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In Franklin County in 20012004 the aggregated average foreclosure rate is 4.27%, with a maximum of 57.14% and a standard deviation of 6.72% (see Table 5.1). Cuyahoga Countys foreclosure rate is lower in this time period, with an aggregated average foreclosure rate of 3.38%. The highest rate is 37.50%. In 19831989 the aggregated average foreclosure rate is 3.67% and the highest rate is 59.02%. Since the two time periods do not have the same length, those numbers are not precisely comparable.. Compared to Franklin County, the distribution of foreclosures in Cuyahoga County is more even, especially in the data period (both 19831989 and 20012004) according to the standard deviation. There is a larger percent of block groups that have been affected by foreclosures (see Table 5.1). Table 5.2 includes the basic descriptive statistics for all the variables used in this analysis of the interactive mutual relationships between foreclosures, neighborhood characteristics, and neighborhood change for Franklin County and Cuyahoga County. We notice that most of the variables are significantly different between the two counties (including the foreclosure rates in 20012004). In the next sections, we will undertake: 1. Several different regressions to estimate the neighborhood effects on foreclosures using the 20012004 foreclosure rates in each county. These models include OLS, spatial models and using H-Robust OLS for heteroskedasticity correction. We will run the models separately for each county. 2. Seemingly Unrelated Regression (SUR) to estimate the impact of foreclosures on neighborhood change using the 19831989 foreclosure rates in Cuyahoga County only since the comparable data in Franklin County are not available.

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Variable FORECLOSURE (8389) FORECLOSURE (0104) Demographic BLACK00 BLACK90 MINORITY00 MINORITY90 MALE142400 FEMALEKID00 FEMALEKID90 DIVORCE00 DIVORCE90 COLLEGEH00 COLLEGEH90 BLACK_D COLL_D DIVOR_D FEMALE_D HH_D Economic INCOME00 ($, 2000) INCOME90 ($, 2000) UNEMPLOY00 UNEMPLOY90 SERVICE00 SERVICE90 MNGMT00 MNGMT90 POVERTY00 POVERTY90 INCOME_D UNEMPLOY_D POVER_D MNGMT_D SERV_D Housing YEARS00 YEARS90 VALUE00 ($, 2000)

Franklin County N Mean 880 0.0427

Cuyahoga County N Mean 1221 0.0367 1262 0.0338

Difference 0.0011 -0.0089***

Neighborhood Characteristics and Change 882 880 882 880 882 880 880 882 879 881 879 880 878 879 878 880 883 883 880 880 880 880 880 880 880 880 880 878 878 878 878 0.2053 0.1665 0.2707 0.1907 0.0839 0.0897 0.0783 0.1225 0.1059 0.5522 0.5029 0.0392 0.0490 0.0167 0.0116 1.2630 44,177.0793 41,777.0000 0.0508 0.0594 0.1566 0.1312 0.3398 0.1371 0.1386 0.1368 0.4212 -0.0088 0.0018 0.2022 0.0255 1243 1244 1243 1244 1243 1241 1242 1243 1244 1243 1244 1238 1238 1238 1238 1242 1262 1262 1240 1242 1240 1240 1240 1240 1241 1244 1242 1236 1238 1236 1236 0.3240 0.2760 0.3794 0.3041 0.0653 0.1030 0.0894 0.1166 0.1012 0.4865 0.4099 0.0481 0.0755 0.0152 0.0128 0.0275 41,029.2710 38,951.0000 0.0778 0.0936 0.1695 0.1469 0.3149 0.1134 0.1519 0.1529 0.4376 -0.0145 -0.0005 0.2006 0.0228 0.1187*** 0.1095*** 0.3041*** 0.1134*** -0.0190*** 0.0132** 0.0111** -0.0060* -0.0050+ -0.0660*** -0.0930*** 0.0090+ 0.0266*** -0.0020 0.0012 -1.2350+ -3,148** -2,826** 0.0270*** 0.0341*** 0.0129** 0.0156*** -0.0250** -0.0240*** 0.0133* 0.0161* 0.0163 -0.0060* -0.0020 -0.0020 -0.0030 -36.89*** -35.91*** -4,655 Continued

883 1956.6365 883 1952.0000 883 110,213.7010

1262 1919.7472 1262 1916.0000 1262 105559.0333

Table 5.2: Descriptive Analysis for Franklin County and Cuyahoga County 143

Table 5.2 Continued

VALUE90 ($, 2000) 883 95,283.0000 HCOSTM00 883 0.2098 VACANCY00 880 0.0671 VACANCY90 880 0.0612 TENURE00 880 0.5820 TENURE90 880 0.5535 MORTGAGE00 846 0.7529 MORTGAGE90 864 0.7100 SMORTGAGE00 846 0.0964 TENURE_D 878 0.0281 OWNER_D 864 0.8762 VACAN_D 878 0.0060 VALUE_D 850 0.6380 Change in Census Place Characteristics Demographic PBLACK_D PCOLL_D PDIVOR_D PFEMALE_D PHH_D Economic PINC_D PUNEMPLOY_D PPOVER_D PMNGMT_D PSERV_D Housing PTENURE_D POWNER_D PVACAN_D PVALUE_D 597 597 597 597 598 598 597 597 597 597 597 598 597 598 0.0214 0.0720 0.0145 0.0098 0.1408 0.3428 -0.0088 -0.0107 0.2236 0.0192 0.0355 0.1644 -0.9937 0.5402 1262 1262 1242 1242 1241 1242 1219 1231 1219 1238 1231 1239 1218 87,465.0000 0.2275 0.0750 0.0647 0.6394 0.6105 0.6721 0.5707 0.0812 0.0286 0.0309 0.0101 0.7220 -7,818** 0.0177*** 0.0079** 0.0034 0.0574*** 0.0571*** -0.0810*** -0.1390*** -0.0150*** 0.0005 -0.8450* 0.0041 0.0839

993 993 993 993 993 993 993 993 993 993 993 993 993 993

0.0435 0.0781 0.0146 0.0141 -0.0069 0.3174 -0.0160 -0.0005 0.1978 0.0244 0.0427 0.0002 -0.9920 0.6910

0.0221*** 0.0061** 0.0001 0.0043 -0.1480*** -0.0250*** -0.0070*** 0.0102*** -0.0260*** 0.0053*** 0.0072+ -0.1640*** 0.0017 0.1508***

Note: Difference = Mean (Cuyahogas) Mean (Franklins) *** 0.001 significant level ** 0.01 significant level * 0.05 significant level + 0.10 significant level

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The following sections will present the research results for the research questions about the effect of neighborhoods on foreclosures and the impact of foreclosures on neighborhoods separately. We begin with the comparison between OLS regressions, spatial regressions and heterscedasticity-corrected regressions to compare the model results and develop the best prediction of the effect of neighborhoods characteristics on foreclosure rates. SUR is used to explore how foreclosures contribute to neighborhood change.

Effects of Neighborhoods on Foreclosure

In order to explore how neighborhood indicators and change affect foreclosure rates in different block groups the three sets of variables (demographic, economic and housing characteristics) and the changes in the variables are used in the analysis. For the foreclosure panel data from 2001 to 2004 static neighborhood characteristics are measured by the 2000 census block group values. In these models only the variables at the neighborhood level are used. The demographic characteristics and changes include indicators of racial composition, family structure, educational attainment, and percentage divorced population. The effects of percent black population and percent minority population are separately considered in the model because the two effects might be different. The economic characteristics and changes include variables related to median household income, unemployment rate, occupational structure and percentage population below the poverty line. Housing characteristics and change variables include the median years that the housing units were built (e.g., 19xx), median housing value of owneroccupied housing units, average housing cost burden, housing vacancy rate,

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homeownership rate, and the mortgage status of owner-occupied housing units. Please refer to the previous section and Chapter 3 for detailed narratives and statistical descriptions of the selected variables. As mentioned in Chapter 3, since spatial data are used in the research the effect of spatial autocorrelation should be tested as the first step of the analysis. Ordinary Least Square (OLS) methods were used in Geoda to test the spatial dependency of the model. Then if there are significant spatial autocorrelation effects in the OLS model, spatial lag or error models have to be tested to see how the spatial autocorrelation has affected the model results. Originally only the neighborhood change variables are included in the OLS model to predict foreclosure rates and the effect of spatial autocorrelation. This research finds that spatial models have significantly improved the model fit by increasing the log likelihood. When static neighborhood characteristics are added into the model the effect of spatial autocorrelation still exists, but the effects have been reduced significantly. This means that spatial autocorrelation is more significant when not controlling for static neighborhood characteristics. When combining the two counties and adding a dummy variable standing for each county I found that the two counties are significantly different in terms of neighborhood effects on foreclosures. Therefore each county will be separated to run the regression models to see how the effects differ. After running the OLS model I found that heteroskedasticity is significant for both counties. In this situation I used Whites robust standard errors to correct for heteroskedasticity. Then I compared the results with the spatial models. Thus I will report results from an OLS model, a model corrected for spatial autocorrelation and a model

146

corrected for heteroskedasticity. At present I am unable to correct for both spatial autocorrelation and heterscedasticity in the same model. Thus I will focus my analysis only on the variables that are significant in both the Heteroskedasticity-Robust OLS11 models and the Spatial Models. There is no difference in the coefficients, but there is a difference in the levels of significance. Thus to make the analysis as conservative as possible, the significance levels of the variables analyzed are determined based on whichever model has the lower significance level for a specific variable . In this way I hope to correct for both heteroskedasticity and spatial autocorrelation even though I am unable to run a statistical model that simultaneously corrects both. Since this method corrects for both heteroskedasticity and spatial autocorrelation separately, future work should formally correct for heteroskedasticity and spatial autocorrelation at the same time.

Summary of OLS and Spatial Regression Models

The OLS results of Franklin Countys neighborhood effects on foreclosures indicate that the R2 is 0.55, which means a relatively good fit. The Jarque-Bera test is used to check for multicollinearity and the result is significant, which indicates that the R-square might improve if multicollinearity is reduced. However, the variables were included for sound theoretical reasons so the research will continue to use them all. Heteroskedasticity is significant for the model too, which means that the error term does not have a constant variance and thus the significant heteroskedasticity has violated one assumption of OLS.. Also the variance of the coefficient distribution increases. However, it is usually difficult to determine the nature of the bias. But the significant heteroskedasticity will not yield

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biased coefficient estimates. The issue of significant heteroskedasticity can be corrected or alleviated by redefining the variables, using Weighted Least Squares to re-estimate the equation, or when working with large samples, using heteroskedasticity-corrected errors to make the standard errors more accurate (though still biased). All the indicators of spatial dependence are significant. In this situation both spatial error and spatial lag models are used to see which one will have the best fit. We notice (see Table 5.3) that both models have improved the R-square slightly12. The spatial lag model turns out to have the higher R2 (0.60) and the spatial lag term is highly significant, although heteroskedasticity still exists. Among the three models (OLS, spatial error and spatial lag) the spatial lag model also has the highest log likelihood. Because it is the strongest model the parameter estimates from the spatial lag model will be analyzed to see what neighborhood characteristics and changes significantly affect the foreclosure rates in Franklin County. Notice that the R2 is 0.54 for the OLS model for Cuyahoga County (see Table 5.4). Muticollinearity and Heteroskedasticity are apparent in this regression as they were for Franklin County. Like Franklin County, when only the change variables are included the effect of spatial autocorrelation on the foreclosure rates is large. But when the static neighborhood characteristic variables are added the spatial effect is greatly reduced. All the indicators for diagnosing spatial dependence (LM lag, Robust LM lag, LM error, and Robust LM error) are significant. Again, both the spatial error and lag models are tested to see which one has the best fit. The spatial lag model has the highest log likelihood in Cuyahoga County as it did in Franklin County. Therefore the spatial lag model is the best fit, although the three models (OLS, spatial error and spatial lag) yield very similar

148

results (as they did in Franklin County). Notice that change in the homeownership rate does not affect foreclosure rates in the OLS model while it does in the Spatial Lag Model (see Table 5.4). This is important because when the spatial autocorrelation of foreclosures is controlled the homeownership rate is significantly related to foreclosure rates. Thus considering spatial effects can improve the model results by changing our view of the neighborhood effects on foreclosures. But the most important reason for using the spatial models is because they can yield more efficient estimates by accounting for spatial effects and the effects of related omitted variables.

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OLS Model StdCoefficient Error Constant 0.0082 0.0191

tValue 0.43

H-Robust OLS StdtCoefficient Error value 0.0082 0.0073 1.12

Spatial Error Model Coefficient 0.0136 Std-Error 0.0188

Spatial Lag Model StdCoefficient z-value Error -0.0084 0.0179 -0.47

Demographic Characteristics and Change BLACK00 MINORITY00 MALE142400 FEMALEKID00 DIVORCE00 COLLEGEH00 BLACK_D COLL_D DIVOR_D FEMALE_D HH_D 0.0276 -0.0010 -0.0390 0.0677+ -0.0617 -0.0664*** 0.0047 0.0357* -0.0284 0.0209 -0.0003 0.0283 0.0265 0.0338 0.0350 0.0525 0.0183 0.0197 0.0180 0.0433 0.0357 0.0002 0.98 -0.04 -1.15 1.93 -1.17 -3.64 0.24 1.99 -0.65 0.58 -1.23 0.0276 -0.001 -0.039 0.0677 -0.0617 -0.0664** 0.0047 0.0357+ -0.0284 0.0209 -0.0003+ 0.0345 0.0290 0.0511 0.0646 0.0708 0.0201 0.0282 0.0187 0.0505 0.0503 0.0002 0.80 -0.03 -0.76 1.05 -0.87 -3.31 0.17 1.91 -0.56 0.42 -1.91 0.0277 0.0090 -0.0305 0.0502 -0.0920+ -0.0740*** -0.0009 0.0435* -0.0307 0.0155 -0.0003 0.0293 0.0271 0.0341 0.0350 0.0516 0.0182 0.0197 0.0176 0.0418 0.0342 0.0002 0.0057 0.0048 -0.0235 0.0569+ -0.0708 -0.0460** 0.0116 0.0229 -0.0311 0.0223 -0.0003 0.0264 0.0246 0.0314 0.0325 0.0488 0.0172 0.0183 0.0168 0.0402 0.0332 0.0002 0.22 0.20 -0.75 1.75 -1.45 -2.67 0.63 1.36 -0.77 0.67 -1.50 Continued

150

Table 5.3: Comparison of OLS Regression and Spatial Regression of the Effect of Neighborhood Characteristics (2000) and Change on Foreclosure Rate in Franklin County (Dependent Variable: Foreclosure Rate)

Table 5.3 Continued

Economic Characteristics and Change INCOME00 UNEMPLOY00 SERVICE00 MNGMT00 POVERTY00 INCOME_D UNEMPLOY_D POVER_D MNGMT_D SERV_D 5.09E-007* 0.1408** 0.1229** -0.0038 0.0604* 0.0080 -0.0221 -0.0655** 0.0053 -0.0438 2.02E-007 0.0519 0.0412 0.0353 0.0235 0.0049 0.0393 0.0252 0.0302 0.0331 2.52 2.71 2.98 -0.11 2.57 1.63 -0.56 -2.60 0.18 -1.32 5.09E07** 0.1408 0.1229+ -0.0038 0.0604+ 0.008 -0.0221 -0.0655* 0.0053 -0.0438 1.7759E07 0.1242 0.0663 0.0340 0.0310 0.0070 0.0751 0.0282 0.0291 0.0469 2.87 1.13 1.85 -0.11 1.95 1.14 -0.29 -2.32 0.18 -0.93 4.01E007* 0.1307** 0.0956* -0.0170 0.0262 0.0104* -0.0063 -0.0372 -0.0023 -0.0304 2.01E-007 0.0495 0.0396 0.0341 0.0235 0.0046 0.0373 0.0241 0.0294 0.0314 4.01E007* 0.1383** 0.1067** 0.0056 0.0230 0.0107* -0.0098 -0.0328 -0.0052 -0.0364 1.88E007 0.0482 0.0383 0.0329 0.0220 0.0046 0.0365 0.0235 0.0281 0.0308 2.13 2.87 2.79 0.17 1.05 2.33 -0.27 -1.40 -0.19 -1.18

151

Housing Characteristics and Change YEARS00 VALUE00 -2.77E-005* -1.02E-007* 1.30E-005 5.10E-008 -2.12 -2.00 -2.77E-05* -1.02E-07* 1.1963E05 4.9611E08 -2.32 -2.06 -1.26E-005 -5.18E-008 1.29E-005 0 -1.71E-005 -7.79E-008 1.21E005 0 -1.41

Continued

Table 5.3 Continued

HCOSTM00 VACANCY00 TENURE00 MORTGAGE00 SMORTGAGE00 TENURE_D OWNER_D VACAN_D VALUE_D LAMDA WFORECLOSURE # of Observations R-Square

0.0011*** 0.3375*** 0.0286* 0.0188+ 0.0315+ -0.0944*** 0.0005 -0.2132*** -0.0019*

0.0003 0.0474 0.0124 0.0097 0.0190 0.0166 0.0005 0.0465 0.0008

3.79 7.13 2.31 1.95 1.65 -5.69 0.95 -4.58 -2.56

0.0011* 0.3375*** 0.0286* 0.0188 0.0315 -0.0944** 0.0005 -0.2132*** -0.0019**

0.0004 0.0710 0.0139 0.0148 0.0310 0.0297 0.0003 0.0623 0.0007

2.47 4.75 2.05 1.27 1.02 -3.18 1.44 -3.42 -2.60

0.0011*** 0.2708*** 0.0182 0.0114 0.0357* -0.0894*** 0.0006 -0.1610*** -0.0013+ 0.3522***

0.0003 0.0474 0.0122 0.0094 0.0178 0.0158 0.0005 0.0458 0.0007 0.0457

0.0011*** 0.2423*** 0.0167 0.0121 0.0344+ -0.0882*** 0.0005 -0.1441*** -0.0015*

0.0003 0.0448 0.0115 0.0090 0.0177 0.0154 0.0005 0.0436 0.0007

3.67 5.41 1.45 1.34 1.94 -5.73 1.00 -3.31 -2.14

152

0.3625*** 883 0.55 883 0.58

0.0402 883 0.60

9.017413

Continued

Table 5.3 Continued

Log Likelihood13 Diagnostics for Multicollinearity Jarque-Bera14

1486.72

1507.47

1523.37

13666.25***

Diagnostics for Heteroskedasticity Breusch-Pagan test15 White test16 2960.84*** 853.01*** 2962.92*** 3031.59***

153

Diagnostics for Spatial Dependence LM (lag) Robust LM (lag) LM (error) Robust LM (error) Likelihood Ratio test 79.62*** 53.69*** 36.57*** 10.64** 41.49*** 73.29***

*** 0.001 significant level ** 0.01 significant level * 0.05 significant level + 0.10 significant level

OLS Model StdCoefficient Error Constant 0.0005 0.0067

tvalue 0.07

H-Robust OLS StdtCoefficient Error value 0.0005 0.0011 0.44

Spatial Error Model Coefficient 0.0123+ Std-Error 0.0071

Spatial Lag Model StdCoefficient z-value Error -0.0083 0.0064 -1.30

Demographic Characteristics and Change BLACK00 MINORITY00 MALE142400 FEMALEKID00 DIVORCE00 COLLEGEH00 BLACK_D COLL_D DIVOR_D FEMALE_D HH_D 0.0289* 0.0067 0.0281 0.0456** -0.0200 -0.0267* 0.0203* 0.0079 0.0204 -0.0054 0.0013 0.0130 0.0139 0.0250 0.0170 0.0253 0.0115 0.0085 0.0109 0.0200 0.0175 0.0019 2.22 0.48 1.13 2.69 -0.79 -2.32 2.40 0.73 1.02 -0.31 0.68 0.0289+ 0.0067 0.0281 0.0456 -0.02 -0.0267* 0.0203* 0.0079 0.0204 -0.0054 0.0013 0.0152 0.0160 0.0425 0.0392 0.0344 0.0114 0.0103 0.0132 0.0262 0.0345 0.0026 1.91 0.42 0.66 1.16 -0.58 -2.34 1.97 0.60 0.78 -0.16 0.49 0.0212 0.0203 0.0246 0.0392* -0.0110 -0.0281* 0.0182+ 0.0101 0.0097 -0.0040 0.0006 0.0143 0.0150 0.0237 0.0164 0.0243 0.0115 0.0095 0.0105 0.0191 0.0167 0.0018 0.0231+ 0.0014 0.0237 0.0379* -0.0153 -0.0190+ 0.0150+ 0.0049 0.0139 -0.0023 0.0011 0.0122 0.0131 0.0234 0.0159 0.0237 0.0108 0.0080 0.0102 0.0187 0.0165 0.0018 1.89 0.11 1.01 2.38 -0.65 -1.76 1.88 0.48 0.74 -0.14 0.61

154

Continued

Table 5.4: Comparison of OLS Regression and Spatial Regression of the Effect of Neighborhood Characteristics (2000) and Change on Foreclosure Rate in Cuyahoga County (Dependent Variable: Foreclosure Rate)

Table 5.4 Continued

Economic Characteristics and Change INCOME00 UNEMPLOY00 SERVICE00 MNGMT00 POVERTY00 INCOME_D UNEMPLOY_D POVER_D MNGMT_D SERV_D 3.52E-7*** -0.0176 -0.0108 -0.0305 0.0557*** -0.0016 0.0183 -0.0368** 0.0023 -0.0115 1.06E-7 0.0249 0.0177 0.0207 0.0154 0.0023 0.0167 0.0139 0.0171 0.0137 3.31 -0.71 -0.61 -1.47 3.61 -0.69 1.09 -2.64 0.14 -0.84 3.52E07*** -0.0176 -0.0108 -0.0305 0.0557* -0.0016 0.0183 -0.0368+ 0.0023 -0.0115 9.9591E08 0.0421 0.0293 0.0251 0.0263 0.0033 0.0346 0.0211 0.0191 0.0209 3.53 -0.42 -0.37 -1.22 2.11 -0.49 0.53 -1.74 0.12 -0.55 2.92E-7** -0.0126 -0.0228 -0.0204 0.0374* -0.0020 0.0216 -0.0341* -0.0066 -0.0039 1.04E-7 0.0237 0.0172 0.0199 0.0152 0.0022 0.0159 0.0135 0.0165 0.0132 2.74E-7** -0.0186 -0.0170 -0.0210 0.0358* -0.0023 0.0215 -0.0302* -0.0054 -0.0075 1.00E7 0.0234 0.0167 0.0195 0.0145 0.0022 0.0157 0.0131 0.0161 0.0129 2.74 -0.79 -1.02 -1.08 2.47 -1.05 1.37 -2.31 -0.34 -0.58

155

Housing Characteristics and Change YEARS00 VALUE00 2.31E-006 -4.16E-008 5.82E-006 2.77E-008 0.39 -1.50 2.31E-06 -4.16E-08 8.6598E06 2.7978E08 0.27 -1.49 2.05E-006 -3.68E-008 5.95E-006 0 8.12E-006 -2.53E-008 5.48E006 0 1.48

Continued

Table 5.4 Continued

HCOSTM00 VACANCY00 TENURE00 MORTGAGE00 SMORTGAGE00 TENURE_D OWNER_D VACAN_D VALUE_D LAMDA WFORECLOSURE # of Observations R-Square Log Likelihood17

0.0587*** 0.0466* -0.0163* 0.0181** -0.0129 -0.0211 -0.0117*** 0.0287 0.0033*

0.0132 0.0228 0.0068 0.0063 0.0124 0.0131 0.0033 0.0200 0.0013

4.44 2.05 -2.40 2.89 -1.04 -1.62 -3.54 1.43 2.48

0.0587* 0.0466 -0.0163+ 0.0181+ -0.0129 -0.0211 -0.0117+ 0.0287 0.0033

0.0243 0.0482 0.0086 0.0107 0.0158 0.0162 0.0066 0.0430 0.0028

2.42 0.97 -1.88 1.70 -0.82 -1.30 -1.77 0.67 1.18

0.0381** 0.0546* -0.0117+ 0.0057 -0.0001 -0.0343** -0.0086** 0.0163 0.0036** 0.3535***

0.0128 0.0221 0.0068 0.0061 0.0120 0.0123 0.0031 0.0195 0.0013 0.0384

0.0391** 0.0378+ -0.0146* 0.0114+ -0.0066 -0.0312* -0.0095** 0.0248 0.0030*

0.0125 0.0214 0.0064 0.0059 0.0117 0.0123 0.0031 0.0188 0.0013

3.13 1.77 -2.28 1.93 -0.56 -2.54 -3.06 1.32 2.31

156

0.3459*** 1262 0.54 2657.05 1262 0.58 2686.90

0.0347 1262 0.59 2704.49

9.97

Continued

Table 5.4 Continued

Diagnostics for Multicollinearity Jarque-Bera18 18287.26***

Diagnostics for Heteroskedasticity Breusch-Pagan test19 White test20 1974.68*** 1157.61*** 1667.17*** 1630.76***

Diagnostics for Spatial Dependence LM (lag) Robust LM (lag) LM (error) Robust LM (error) Likelihood Ratio test 107.72*** 72.70*** 51.25*** 16.23*** 59.71*** 94.89***

157

*** ** *
+

0.001 significant level 0.01 significant level 0.05 significant level 0.10 significant level

The following narrative will report the variables that are significant for both the Heteroskedasticity-Robust OLS and Spatial Lag Model, so that we can make the results more efficient by correcting for each problem separately but considering their results together. In Franklin County, when the Robust OLS model and the spatial lag models are both used none of the change variables among the demographic characteristics are significant. However, one static neighborhood characteristic is significant in both models and thus is related to foreclosures (see Table 5.3). In addition racial composition in 2000, which was assumed to affect foreclosures, is not significant for Franklin County, when controlling for other factors. The percentage divorced population does not affect foreclosures either. The only one demographic variable that is significant is percentage population with college degree or higher and the relationship, as expected, is negative. None of the economic change variables have an effect on foreclosure rates in Franklin County. Median household income in 2000 has a positive relationship with foreclosures in both models. This seems strange since higher income should be associated with lower foreclosure rates. Perhaps this is the remaining effect of median income once educational level is accounted for. Poverty level and percentage population employed in executive or management occupation do not have a significant impact on foreclosure rates. However, percentage population employed in service occupations is significant and positive in both of the models we are considering. More changes in housing characteristics have significant impacts on foreclosure rates in neighborhoods in Franklin County than any other variable type. Change in the

158

homeownership rate, change in the housing vacancy rate, and change in housing value are all negatively related to foreclosure rates. This means that high turnover and change in housing characteristics in 19902000 are related to foreclosure rates in 20012004 in Franklin County. The change in housing vacancy rates is negatively related to foreclosures and this might mean that more dynamic housing markets have fewer foreclosures. Among static housing characteristics in 2000 the average housing cost burden and the housing vacancy rate are significant factors affecting foreclosure rates and both are positive in both the H-Robust model and the spatial lag model. Thus neighborhoods where residents pay significant portions of their income, and those with high vacancy rates are at more risk of foreclosures in Franklin County. In Cuyahoga County, the effect of neighborhood demographic characteristics and change on foreclosure is very similar to that in Franklin County. Educational attainment in 2000 is the one of the major factors in both equations, with the expected negative sign. But in Cuyahoga County percentage black population and its change are also significant (and positive) in affecting foreclosures, although the significance level is 0.10. The potential reason for this difference between the two counties might be the difference in racial composition between the two counties. Cuyahoga County has a larger percent of black population than Franklin County. So either the larger proportion or more segregation could cause this effect. The standard deviation of percentage black population is larger than that in Franklin County too, which means that black population in Cuyahoga County is more clustered than in Franklin County. Percentage minority population does not have a significant effect on foreclosures in either county.

159

Cuyahoga Countys results for the impact of economic neighborhood characteristics on foreclosure rates are slightly different from those for Franklin County. The percentage population below the poverty line (positive) and its change (negative) has significant impacts on foreclosures in Cuyahoga County unlike Franklin County. Similar to Franklin County, median household income has a positive relationship with foreclosures. The change in percentage population below the poverty line is negatively related to foreclosures and this might be because of collinearity, omitted variables, and some other reasons. While in Franklin County, occupational structure (percentage population employed in service occupations) also affects foreclosures, but this has no significant impact in Cuyahoga County. Average housing cost burden, Homeownership rate, change in number of owneroccupied housing units, and percentage of housing units with a mortgage are all significant factors affecting foreclosures in Cuyahoga County in both models. This is very different from Franklin County. In fact, average housing cost burden is the only common factor for both counties regarding the effect of housing characteristics and change on foreclosures.

Common Neighborhood Characteristics Affecting Foreclosures in Both Counties

Educational Attainment
The importance of residents educational attainment in determining neighborhood quality has been stated in previous chapters. Educational attainment is highly related to median household income, housing value, and other neighborhood or personal indicators. But when controlling for most of those indicators educational attainment still remains

160

significant. This might mean that educational attainment is more important than other factors in contributing to foreclosure. Another explanation of why educational attainment in a neighborhood is related to foreclosure might be because the higher the educational attainment of a household the more possible it is for them to have a prime loan. They will also be less likely to become the victims of predatory lending. The models found that the higher the educational attainment of the residents in a neighborhood the lower the foreclosure rate in that neighborhood for both counties, controlling for other factors.

Median Household Income

We expected that median household income will be negatively related to foreclosures. But this research finds that in both counties median household income is positively related to foreclosure rates. This seems strange. But this might be because although a neighborhood has a higher income the housing cost burden can be high, thus contributing to more foreclosures. As suggested above, this may be a residual effect after educational attainment is taken into account. Another explanation is that householders with lower income in a higher income neighborhood might be more likely to default on their properties and thus increased the foreclosure rates in that neighborhood. However, those explanations should not ignore the possible effect of omitted variables and other factors in the regression.

Average Housing Cost Burden

The average housing cost burden is measured by the ratio of housing expenses (with a mortgage) to monthly income in the neighborhood. The results indicate that a higher

161

housing cost burden has a positive effect on foreclosure rates. In the spatial lag model in Franklin County a one percentage point increase (or decrease) in the average housing cost burden is related to a foreclosure rate increase (or decrease) of 0.0011% points. This effect is not very large but it is significant at the 0.001 level (see Table 5.3). In Cuyahoga County when the housing cost burden is 1% point higher (or lower) foreclosure rates increase (or decrease) by 0.0391% points (see Table 5.4). This result is consistent with that in Franklin County. A large housing cost burden seems to be a consistent indicator of neighborhoods with higher foreclosure risks.

Difference in the Effect of Neighborhood Characteristics on Foreclosures in Each County Franklin County

Percentage Labor Force Employed in Service Occupation

The use of the variable percentage labor force employed in service occupations in this research is intended to explore how service occupations, which are often associated with lower paying and/or unstable jobs, affect foreclosure rates in neighborhoods. The results in Franklin County indicate that service employment is positively related to foreclosure rates. The variable was not significant in Cuyahoga County.

Housing Vacancy Rate

The housing vacancy rate is one of the most important indicators of the health of housing markets. Higher housing vacancy rates usually mean a surplus of housing supply compared to housing demand. Housing vacancy is necessary in the housing market since in many situations the housing absorption rate cannot be as high as 100% (if it were 162

mobility would be severely restricted). A moderate to low housing vacancy rate usually will not have a significant negative effect on the housing markets (thought it might drive up prices). But a high housing vacancy rate indicates a housing market that is unhealthy. This research found that the housing vacancy rate has a significant positive impact on the foreclosure rate in one of the two study areas, but not the other. This means that neighborhoods with a weak housing market will have much higher foreclosure rates.

Change in Homeownership Rate

The homeownership rate in a neighborhood should be related to foreclosures because previous research found that homeownership is highly related to neighborhood quality and stability. We find that the change in the homeownership rate is negatively related to foreclosures in Franklin County only (see Table 5.3). This means that increases in the homeownership rate will lower the foreclosure rate in a neighborhood in that county.

Change in Housing Vacancy Rate

The research results indicate that the higher the change in housing vacancy rate in a neighborhood, the lower the foreclosure rates in Franklin County. This means that the increases in vacancy rates in a neighborhood are negatively related to foreclosure rates. This seems counter intuitive, but might indicate that the more dynamic a neighborhood housing market is the less likely the neighborhood will have a high foreclosure rate.

163

Change in Median Housing Value

In the literature housing value is found to have a strong impact on foreclosures, especially for individual homeowners. Many scholars believe that negative home equity is one of the factors leading to mortgage default decisions of the borrowers and it can arise from negative appreciation and low house values. However this study examines neighborhoods, not individual owners and found that the median housing value does not have an effect on foreclosure rates at the neighborhood level, holding other things constant. However, in Franklin County the change in median housing value has a negative relationship with foreclosure rate. When the average housing values increase foreclosure rates decrease. This argues that change in value is more critical than the average value in a neighborhood in Franklin County and an upward trajectory is important as we would expect.

Cuyahoga County

Percentage Black Population and Change

We found that racial composition and turnover (especially percentage black population and change in percentage black population) have a significant positive impact on foreclosures in Cuyahoga County. The more racial turnover (i.e. increase in percentage black population), the higher the foreclosure rate, which means that racially stable neighborhoods will have a relatively lower foreclosure rate, though stable white neighborhoods have lower foreclosure rates than stable black neighborhoods.

164

Percentage Population below the Poverty Line and Change

Percentage population below the poverty line has a positive impact on foreclosures in Cuyahoga County. Therefore, poorer neighborhoods are often associated with higher foreclosure rates in Cuyahoga County, but not in Franklin County. A higher poverty level in 2000 is associated with higher foreclosure rates in the later time period, but the more the poverty rate increased between 1990 and 2000, the smaller that effect. This might mean that when there is more population below the poverty line, housing affordability will decrease thus fewer people will have mortgages. Foreclosure rates will decrease with the decrease in affordability.

Homeownership Rate and Change in Percentage Owner-occupied Housing Units

The homeownership rate has a negative relationship with foreclosure rates. This result is different from that in Franklin County because in Franklin County the homeownership rate itself does not have an impact on foreclosures. The change in percentage owner-occupied housing units is also found to be positively related to foreclosure rates in Cuyahoga County. The effect is similar to that of the change in homeownership rate.

Percentage Housing Units with a Mortgage

This indicator has a significant effect on foreclosures in Cuyahoga County but not in Franklin County. The larger the percentage owner-occupied housing units with a

mortgage, the higher the foreclosure rates (see Table 5.4). In contemporary U.S. society the majority of owner households hold a mortgage. In Franklin County the

165

homeownership rate is slightly higher than that in Cuyahoga County but this variable is not significant.

166

Summary: Effects of Neighborhood Characteristics on Residential Mortgage Foreclosure

Comparing the research results from the two counties we found that the same economic characteristics and change variables do not significantly affect foreclosures (see Table 5.5). This is consistent with our initial expectations because the economic situations of the two counties are different, thus the neighborhood effects on foreclosures might be different. However, the counties have some similarities in terms of the effect of neighborhood characteristics and change, although some of the variables have different impact on foreclosures in the two counties. For both counties percentage population with college degrees or higher has a negative impact on foreclosures. Therefore, educational attainment at the neighborhood level is the common and important factor contributing to neighborhood foreclosures. Educational attainment is related to many other factors. More education leads to higher and more stable income, and the higher the educational attainment the less likely that the residents will be the victims of mortgage fraud and/or predatory lending, thus lowering the foreclosure rates. For both counties median household income has a positive impact on foreclosures, which is difficult to explain. However, this might be related to the increasing housing cost burden. The increase in housing value and costs associated with owning a home is much larger than the increase in median household income, thus the increase in median household income is positively related to foreclosures. At the same time the increase in median household income will also make it easier for homeowners to get mortgages in

167

these neighborhoods, and people may stretch to purchase the most expensive houses thus using mortgage types invented in the late 1990s which are more risky. For both counties housing cost burdens has a positive impact on foreclosures. This is consistent with our expectations and detailed narratives of the rationales can be found in previous sections.

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Franklin County Demographic Characteristics and Change BLACK00 COLLEGEH00 - (0.01) BLACK_D Economic Characteristics and Change INCOME00 + (0.05) SERVICE00 + (0.01) POVERTY00 POVER_D Housing Characteristics and Change HCOSTM00 VACANCY00 TENURE00 MORTGAGE00 TENURE_D OWNER_D VACAN_D VALUE_D Spatial Lagged Foreclosure Rate W-FORECLOSURE + (0.05) + (0.001)

Cuyahoga County + (0.10) - (0.10) + (0.10) + (0.01) + (0.05) - (0.10) + (0.05) - (0.10) + (0.10)

- (0.01) - (0.10) - (0.001) - (0.05) + (0.001) + (0.001)

Note: + (0.05) = sign (significant level)

Table 5.5: Variables that are Significant in Each County

169

There are some differences in neighborhood effects on foreclosures between the two counties (see Table 5.5). Percentage black population is related to foreclosures in Cuyahoga County but not in Franklin County. This might be because the two counties have different racial characteristics. In Cuyahoga County there is a larger percent of black population and the distribution of the black population in different block groups is more segregated. Change in percentage black population is the only change variable in demographic characteristics that is significant for Cuyahoga County, although not for Franklin County. Economic effects are quite different for the two counties. In Franklin County the occupational structure has impacts on foreclosures, while in Cuyahoga County the poverty rate (percentage population below the poverty line) and its change play dominant roles in affecting foreclosures. It is not clear why the percentage population below the poverty line affects foreclosures, especially when controlling for unemployment rate, occupational structure and median household income. Probably it is because high poverty in the neighborhood may make it unlikely that houses there will be worth anything thus householders are more likely to walk away. The change in this percentage has a negative relationship with foreclosure rates. This might mean that when there is a higher decrease in percentage population below the poverty line there will be a lower foreclosure rate. Among the housing characteristics and change variables (except average housing cost burden), all significant variables are different between the counties. In Franklin County, housing vacancy rates have a significant positive impact on foreclosures. This is not surprising since higher vacancy rates are usually associated with neighborhoods with decreased life and housing quality. The decreased housing quality will lower the housing

170

values and thus might force the homeowners to default on the property. On the other hand, neighborhoods with higher vacancy rates will have more people with lower income these people may more easily become victims of foreclosures. Change in homeownership rate, change in housing vacancy rate, and change in median housing value are all negatively related to foreclosures in Franklin County. In Cuyahoga County foreclosure is negatively related to the homeownership rate, although at a 0.10 significance level. Neighborhoods with more renters are usually associated with lower incomes and this becomes a factor contributing to neighborhood foreclosures. The percentage of housing units with a mortgage also has a positive significant effect on foreclosures. Similar to the effect of homeownership rate on foreclosures change in owner-occupied housing units has a negative impact on foreclosures. The effect of the change in housing value on foreclosures has mixed results in the two counties. In Franklin County it has the expected negative impact on foreclosures, which means that the larger the increase in housing value, the lower the foreclosure rate, and the higher the decline in housing value the higher the foreclosure rate. In Cuyahoga County median housing value does not have a relationship with foreclosures. Neighborhood effects on foreclosures share some common factors between the two counties, but each county has also shown some different issues. The effect of racial composition and turnover only exists in Cuyahoga County and is very important to explore further. Change in housing value has a different effect on foreclosures in the two counties. The importance of educational attainment, median household income, and housing cost burden to foreclosures is consistent between the two counties. Although we cannot conclude that those factors affect foreclosures equally or universally in other

171

counties in or out of Ohio, this research serves as a good first step in understanding the neighborhood factors contributing to foreclosures in a neighborhood. A detailed conclusion and policy implications based on these research results will be presented in Chapter 6. So far I have analyzed the effect of neighborhood characteristics and change on foreclosure rates. In the next section I turn to the impact of foreclosure rates on neighborhood change.

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The Impact of Residential Mortgage Foreclosure on Neighborhood Change: A Seemingly Unrelated Regression (SUR) Approach
The impact of residential mortgage foreclosure on neighborhood change is measured by predicting the effect of foreclosures in 19831989 in Cuyahoga County on neighborhood change in 19902000. Since Sheriffs Deeds in 19831989 in Franklin County are not available or not geographically identifiable, only Cuyahoga Countys data will be used to test whether mortgage foreclosure has an impact on neighborhood changes. The results of the previous section indicate significant differences between the two counties, so it is unfortunate that we cannot study Franklin County. However, the research methodology can be duplicated in the future when testing the impact in other geographic areas. As mentioned in the research methodology section SUR systems can estimate regression coefficients more efficiently than single-equation OLS regressions (Zellner, 1962) when certain assumptions are met. This research compares the results of OLS and SUR, and finds that SUR can better predict the equation systems than OLS due to the correlated cross-model errors (see Table 5.6 for the Cross Model Covariance Matrix in Cuyahoga County) since it considers the correlation between error terms of the equations. In SUR procedures all coefficients are estimated simultaneously by using Aitkens general least squares (GLS). The goodness of fit of the SUR system is generally based on the weighted system R-square and weighted mean square error (MSE) of the equation systems. In order to minimize the determinant of the error covariance matrix Iterated SUR21 (ITSUR) was used in this research. All fourteen neighborhood change variables are used as dependent variables in the SUR system. The independent variables are chosen based on the correlation coefficients of those variables with the change variables. The 173

ones with a coefficient lower than 0.02 are omitted from the equation system. Although independent variables in all other equations are the subsets of the ones in the equation of median housing value (as the dependent variable), ITSUR will still be used to include the effects of correlated error terms between equations. In ITSUR estimation, other factors, such as spatial effects, might be omitted variables, and thus can bias the error structure. The OLS and ITSUR estimations yield similar parameter estimates. Due to correlated residuals between the equations, ITSUR is more efficient than OLS and produces more accurate estimates than OLS. When running the ITSUR system, the weighted R-square is 0.4104 and the Weighted MSE is 1.0000, with 11,276 degrees of freedom. The model fits relatively well with the data. The results indicate that foreclosure rates have a relationship with educational attainment, change in percentage divorced population, change in female headship rate, change in percentage population below the poverty line, change in homeownership rate, change in housing vacancy rate, and change in median housing values (see Table 5.7 for details). All of the signs are consistent with our expectations expect for the negative relationship of foreclosure rates with change in housing vacancies and the positive relationship of foreclosures with change in property values. Future investigations should focus on understanding these results.

174

BLACK_D COLL_D DIVOR_D FEMALE_D HH_D INCOME_D UNEMPLOY_D POVER_D MNGMT_D SERV_D TENURE_D OWNER_D VACAN_D VALUE_D

BLACK_D 0.010146 -.000391 0.000006 0.002190 -.000408 -.001299 0.000709 0.001388 -.000498 0.000815 -.000696 -.002565 0.000421 -.002666

COLL_D -.000391 0.005776 -.000051 -.000115 0.002255 0.002930 -.000532 -.001132 0.002719 -.000959 0.000299 0.002221 -.000193 0.001252

DIVOR_D 0.000006 -.000051 0.001581 0.000203 -.000645 -.000591 -.000089 0.000253 -.000080 -.000016 -.000344 -.001085 0.000037 -.001221

FEMALE_D 0.002190 -.000115 0.000203 0.003671 -.000524 -.003213 0.000598 0.001468 -.000399 0.000462 -.001127 -.001868 0.000089 -.000930

HH_D -.000408 0.002255 -.000645 -.000524 0.314843 -.000363 -.001453 -.001785 0.000210 0.000513 -.003801 0.087901 -.000245 0.007705

INCOME_D -.001299 0.002930 -.000591 -.003213 -.000363 0.071090 -.003270 -.009223 0.001749 -.001802 0.005347 0.011377 0.000171 0.010164

UNEMPLOY_D 0.000709 -.000532 -.000089 0.000598 -.001453 -.003270 0.002521 0.001122 -.000062 -.000009 -.000524 -.002604 0.000031 -.000436 Continued

175

BLACK_D COLL_D DIVOR_D FEMALE_D

POVER_D 0.001388 -.001132 0.000253 0.001468

MNGMT_D SERV_D TENURE_D OWNER_D VACAN_D -.000498 0.000815 -.000696 -.002565 0.000421 0.002719 -.000959 0.000299 0.002221 -.000193 -.000080 -.000016 -.000344 -.001085 0.000037 -.000399 0.000462 -.001127 -.001868 0.000089

VALUE_D -.002666 0.001252 -.001221 -.000930 Continued

Table 5.6: Cross Model Covariance Matrix for Cuyahoga County

Table 5.6 Continued

HH_D INCOME_D UNEMPLOY POVER_D MNGMT_D SERV_D TENURE_D OWNER_D VACAN_D VALUE_D

-.001785 -.009223 0.001122 0.005798 -.000254 0.000436 -.001630 -.003185 0.000291 -.000401

0.000210 0.001749 -.000062 -.000254 0.006618 -.001707 0.000159 0.001453 -.000350 0.002442

0.000513 -.001802 -.000009 0.000436 -.001707 0.004211 -.000422 -.001630 0.000237 0.000757

-.003801 0.005347 -.000524 -.001630 0.000159 -.000422 0.006603 0.013371 -.000073 0.001457

0.087901 0.011377 -.002604 -.003185 0.001453 -.001630 0.013371 0.128129 -.001351 0.055470

-.000245 0.000171 0.000031 0.000291 -.000350 0.000237 -.000073 -.001351 0.001589 0.000537

0.007705 0.010164 -.000436 -.000401 0.002442 0.000757 0.001457 0.055470 0.000537 0.322328

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Dependent Variable ROOT MSE () INTERCEPT FORECLOSURE(8389)

COLL_D 0.0760 0.1190 -0.1682*

DIVOR_D 0.0398 0.3627 -0.0699+

FEMALE_D POVER_D TENURE_D VACAN_D VALUE_D 0.0606 -0.0492 0.2563*** 0.0761 0.7368 0.1459* 0.0813 0.0506 0.1670* 0.0399 1.2556*** -0.0778* 0.5677 7.3071+ 1.6666**

Neighborhood Characteristics Demographic BLACK90 MINORITY90 FEMALEKID90 DIVORCE90 COLLEGEH90 Economic INCOME90 UNEMPLOY90 SERVICE90 MNGMT90 POVERTY90 0.0807+ 0.1115 1.53e-7 -2.46e-7 -0.0279 0.0181 -0.0677* -0.0340
+

0.0373 -0.0403 -0.1401** -0.0766 -0.4443***

0.0673* -0.0596* -0.0796** -0.8414***

0.1262** -0.1266** -0.5158*** 0.0623 -0.0858***

-0.1254* 0.1338* 0.0904+ 0.0669 -0.1225*** 1.48e-7

-0.0164 0.0268 0.0513 -0.0350 -0.0234 1.23e-6*** -0.0764 0.0386 -0.0195

0.0495+ -0.0401 0.1349*** 0.0636+ -0.0329+ 1.38e-7 -0.0069 -0.0270 0.0446 0.0703***

0.1657 -0.1202 -1.8341*** -0.9315+ 0.3832 9.87e-6*** -0.0469 -0.0243 0.4335 1.7100*** Continued

177

0.1699*** -0.0163 -0.0131 -0.0486

+

0.2247*** 0.0169 -0.0541 -0.7100***

Table 5.7: ITSUR Estimate Results with FORECLOSURE (as an independent variable) Significant (System Weighted R-Square: 0.4104; System Weighted MSE: 1.0000)22

Table 5.7 Continued

Housing YEARS90 VALUE90 VACANCY90 TENURE90 MORTGAGE90 0.0008 0.0121 -0.0001 4.17e-7*** 0.0001+ -1.06e-7
+

0.0001 -8.74e-8 -0.0265* -4.51e-8 0.1398* -0.1036*** -0.0225 0.1104

+

-0.00003 -3.16e-8 -0.7190*** -0.0482*** -0.0461*** -0.1371***

-0.0027*** -5.96e-6*** -0.5080 -0.4954** -0.4221***

-0.0473 -0.0688*** 0.0141+

Change in Census Place Characteristics Demographic PBLACK_D PCOLL_D PDIVOR_D PFEMALE_D PHH_D Economic PINC_D PUNEMPLOY_D -0.0160 -0.0536 -0.4558 0.0227 0.0640 -0.8730 0.1259 0.1899 0.1194* -0.0701 0.5540 2.5299 0.2796* 0.1782 0.2181 -1.1866* -0.3208 0.0389 -0.1029 0.6753** -0.0614 0.1022 0.1285 -0.3364
+

178

0.0352 -0.0587 0.3289 -0.5063 0.4887 0.0604 0.2108 -0.1913 -0.0941 0.0251 -0.2138 0.2054

-0.7434 0.1222 -1.4291 1.5499 1.1049

0.0637 0.5197

Continued

Table 5.7 Continued

PPOVER_D PMNGMT_D PSERV_D Housing PTENURE_D POWNER_D PVALUE_D PVACAN_D

-0.4454 0.5262*** -0.4456

-0.0308 -0.2809 0.3850

-0.2043 0.1040*

0.4194 0.1523* 0.0390 0.4911

-0.0795 -0.0689 0.1722 0.2745 -0.1090 0.0145 0.1705 0.3749 -0.1738 -0.1013* 1.0987***

-0.8259 -0.0046 1.5269 0.3099 -0.1033 -0.4427 1.1508

0.2524 0.0225 -0.2136

-0.1190 0.0517 0.3548

-0.0005 -0.0200 -0.1501

-0.5103 -0.0562 0.7613

179
*** 0.001 significant level * 0.05 significant level ** 0.01 significant level + 0.10 significant level

Change Variables Associated with Foreclosures

As mentioned before there are seven change variables that are significantly related to foreclosures: change in educational attainment (negative), change in percentage divorced population (negative), change in female headship rate (positive), change in percentage population below the poverty line (positive), change in homeownership rate (positive), change in housing vacancy rate (negative), and change in median housing value (positive). The foreclosure rate has different levels of significance in those regression equations. In all other equations where the dependent variables are the other change variables, foreclosure rate is not significant. The estimate results of those latter equations are in Appendix D (Table D.1).

Change in Percentage Population with College or Higher Education (>25 years old)
The importance of residents educational attainment to the quality and stability of a neighborhood has been stated in previous sections. In this analysis the research found that foreclosure rates are negatively related to the change in percentage population with college degrees or higher. This means that higher foreclosure rates in the previous time period are associated with a lower increase (or a larger decrease) in the percentage population with college degrees or higher. This is consistent with our expectations because educational attainment is highly related to other household characteristics, and thus can be related to foreclosures. Neighborhoods with higher foreclosures are usually associated with poor neighborhood quality. Neighborhood decline associated with foreclosures will be less attractive to populations with higher education attainment. It is also possible that people with higher educational attainment move out of 180

neighborhoods because of the expected impact of the rising foreclosure rates on housing values, crime and other neighborhood indicators. On the other hand, the lower increase or larger decrease in educational attainment associated with higher foreclosure rates might be because the neighborhoods with higher foreclosure rates have characteristics that attract people with lower educational attainment, thus the in-movement of those people will lower the general educational attainments of the residents in those neighborhoods.

Change in Percentage Divorced Population (>16 years old)

It is interesting to see that foreclosures are associated with the change in percentage divorced population in a negative way. This means that higher foreclosure rates in the previous time period are related to lower increase (or higher decrease) in the percentage divorced population in a neighborhood. There are several potential explanations for this phenomenon. The first one is that more divorced people had their homes foreclosed and moved out of the neighborhoods. Foreclosures can be caused by the financial shock of a divorce and divorced householders may be at more risk of other financial problems. On the other hand, it is also possible that the foreclosed homes are attractive to singles or married couples, especially those first-time homebuyers who can only afford the discounted price of those foreclosed houses. Another possibility would be gentrification pioneers (those who are not divorced) purchasing the foreclosed properties from which divorced households move out.

181

Change in Female Headship Rate

The female headship rate is widely used to measure neighborhood quality (Galster and Krall, 2003) and how welfare policy and benefits affect family structure (especially the formation of female-led households) (Moffitt, 2000). Female-led households are vulnerable to various financial and housing hardships, and are often the victims of predatory lending (CRL, 2004). According to the Center for Responsible Lending (CRL), female-led households also account for a larger share of subprime loans than of prime loans. Given all these entire issues associated with female-led households, it is not surprising to see that foreclosures have a positive relationship with the change in female headship rate. This means that higher foreclosure rates in the previous time period are associated with faster increases (or slower decreases) in the percentage of female-led households. Higher foreclosures usually happen in neighborhoods with higher percentage female-led households. And many of those households are minority, especially black households. Because those female-led households are in a more vulnerable financial situation on average they are more likely to become victims of foreclosure. Even if many of those householders are renters, the clustering of this type of households is often associated with poor neighborhood quality. In such a neighborhood if a homeowner gets in trouble there is less reason to try to work out the problem and it is more likely that the homeowners will give up the property to foreclosure and move away. When the higher foreclosure rates and the concentration of female-led households are highly associated with each other, creates an even more vulnerable environment for female-led households. Policy makers might want to pay more attention to neighborhoods with concentrations of 182

female-led households. It might also be a good idea to initiate programs to help those households in dealing with the stress and impacts of foreclosures.

Change in Percentage Population below the Poverty Line

The research found that foreclosures have a positive relationship with the change in percentage population below the poverty line. This means that higher foreclosures between 1983 and 1989 are associated with a larger increase (or a slower decrease) in the percentage population below the poverty line during the subsequent decade. Thus higher foreclosures are related to the neighborhoods that are more likely to have a concentration of population below the poverty line. Higher foreclosures can make a neighborhood less attractive to people with higher income because of the decreased quality of houses and neighborhoods. On the one hand higher foreclosures will increase housing vacancy rates when homeowners are forced to move out of the neighborhood because of foreclosures or simply because of the deteriorated neighborhood and housing quality. The loss of homeowners can increase the percentage population below the poverty line in the neighborhoods. On the other hand, even if the foreclosed houses are occupied again, the new owners or renters might be those with lower income, even those below the poverty line, since the home is likely to be sold at a discount. This can contribute to the increase in percentage population below the poverty line. Homeowners who have not been foreclosed are also likely to leave

neighborhoods with high foreclosure rates and those homes may be subdivided for rental to lower income groups.

183

Change in Homeownership Rate

The importance of homeownership has been stated by many scholars in their research, and the interaction between the homeownership rate and foreclosures is very important and can have significant policy implications. This research has very important findings in terms of the relationships between the two. Both the homeownership rate and the change in the rate have been found to affect foreclosure rates in the preceding analysis of neighborhood effects on foreclosures. In this section the research found that foreclosures in a previous time period are associated with the later change in the homeownership rate in a positive manner. This means that an increase in foreclosure rates is associated with an increase or slower decrease in the homeownership rate. This seems to be the opposite of what we expected. This might mean that higher foreclosures in some neighborhoods will cause housing values to drop, thus attracting lower income people moving into those neighborhoods to become homeowners, even to occupy the previously vacant properties or rental properties. This is a very important possibility given how often we try to get more owners in a neighborhood by getting poorer people (more likely to have a foreclosure) into owner-occupied houses in those neighborhoods. When foreclosure rates rise in a neighborhood there will be more vacant housing units. Many of those houses (even those who are not foreclosed in the research time period) are purchased by people. Therefore, the neighborhood may gain some owners because of the foreclosure. Another possible reason is that gentrification can happen in those neighborhoods with higher foreclosures (and lower values), and thus the process of gentrification can improve the homeownership rate in those neighborhoods.

184

On the other hand, if a neighborhood is experiencing decreasing homeownership rate, increasing foreclosure rates will slow down the decreasing process. Foreclosures being positively associated with increases in homeownership rates in Cuyahoga County, is difficult to explain. It may be accurate with the some possible explanations listed above or there may be omitted variables that were not controlled. Further investigation can be helpful if there are data available in other geographic areas, or if there are other important variables to include.

Change in Housing Vacancy Rate

The housing vacancy rate has been found to positively contribute to foreclosures in previous neighborhood effects research. In this analysis of the impact of foreclosures on neighborhood change the results indicate that foreclosures have a negative relationship with housing vacancy rates. This means that higher foreclosures in a previous time period are associated with slower increases (or faster decreases) of housing vacancy rates in the subsequent decade. This is also an unexpected result, similar to the relationship between foreclsoures and the change in the homeownership rate. It might be because higher foreclosures will bring investors to those foreclosed properties (including the ones foreclosed beyond the research time period) and those properties are converted to rental properties (with higher value than they had as owner occupied properties especially if subdivided). Another explanation could be the effect of redevelopment and/or gentrifications. These processes will reduce vacant housing units in those neighborhoods. Concentrations of foreclosures (higher foreclosure rates) might attract various kinds of investors to inexpensive properties. If these investors are gentrifiers, in particular, the 185

time gap between the two sets of data used in this analysis could allow for improvements in the units, decreases in vacancy rates and increases in property values.

Change in Median Housing Values

As mentioned in the previous section of neighborhood effects research, the relationship between the change in median housing value and foreclosures has different results in the two counties. In Franklin County, change in median housing value is negatively related to subsequent foreclosure rates, but in Cuyahoga County change in median housing value is positively related to subsequent foreclosure rates. In this analysis of the impact of foreclosures on later housing values we found that foreclosures have a positive relationship with change in median housing value in Cuyahoga County. This seems odd and deserves more research. Although we argue that urban redevelopment policies and gentrification might cause this effect, it is also possible that omitted variables, time differences between the data sets and data collection errors might also contribute to this unexpected phenomenon. The results indicate that higher foreclosures are associated with a larger increase (or a slower decrease) in median housing values. In this situation, when two neighborhoods both have an increased median housing value, the one with a higher foreclosure rate will be associated with a larger increase in the value (might be associated with subsequent revitalization or gentrification processes). When two neighborhoods both have a decreased median housing value a higher foreclosure rate is associated with a slower decrease in median housing value (might be associated with increased housing values due to renovated foreclosed properties). If one neighborhood has an increased median 186

housing value and the other one has a decreased median housing value, the neighborhood with a higher foreclosure rate is the one with an increased median housing value.

187

Conclusion: The Interaction between Residential Mortgage Foreclosure, Neighborhood Characteristics, and Neighborhood Change
The interaction between residential mortgage foreclosure and neighborhood characteristics and change is very complicated and there are many factors related to the issue. However, this research finds some very interesting phenomena among the relationship. The two elements interact with each other in terms of specified neighborhood indicators and their changes. The research results do not support all of the initial hypotheses, and so contradict some previous research on the topic. First of all, neighborhood characteristics and change in the immediately proceeding time period affects foreclosure rates. Many factors are involved, although some of the effects are different for the two study counties. Common factors affecting foreclosures for the two counties are percentage population with college degrees or higher, median household income, and average housing cost burden. In Cuyahoga County percentage black population and the change in this percentage has a positive relationship with foreclosures. However, foreclosure does not affect the change in percentage black population in Cuyahoga County. This finding is very different from what Baxter and Lauria (2000) found in the relationship between foreclosures and racial turnover in New Orleans. It is difficult to determine which finding is more appropriate because there are many differences in social-economic characteristics in different places. If some of the characteristics are not controlled there will be inconsistent results from the analyses. The results may also indicate the importance of local context to the impact of foreclosure. There are also some unique attributes in the neighborhood effects of each county. When looking at demographic characteristics and change we found that percentage black

188

population and the change in percentage black population has an impact on foreclosures in Cuyahoga County, which is not the case in Franklin County. From the point of view of economic characteristics and change, percentage labor force employed in service occupation affects foreclosures in Franklin County, while percentage population below the poverty line and the change in the percentage affect foreclosures in Cuyahoga County. Besides the common housing factor change in homeownership rate, change in housing vacancy rate and change in median housing value are all negatively affect foreclosures in Franklin County, while homeownership rate, percentage housing units with a mortgage, and change in owner-occupied housing units affect foreclosures in Cuyahoga County. The reasons for these differences between counties need further exploration. When we examine whether and how foreclosures affect neighborhood change in Cuyahoga County using the 1983-1989 foreclosure data we found that there are seven change variables from 1990 to 2000 that are significantly related to those earlier foreclosures: change in educational attainment (negatively), change in percentage divorced population (negatively), change in female headship rate (positively), change in percentage population below the poverty line (positively), change in homeownership rate (positively), change in housing vacancy rate (negatively), and change in median housing value (positively). Among those relationships the ones between change in homeownership, change in housing vacancy rate, and change in median housing value are different from what we expected. We argued that perhaps neighborhood revitalization, renovation of the foreclosed properties, and/or gentrification might contribute to those relationships. Also data collection errors, omitted variables, the correlation between the 189

change variables at the neighborhood level, the relatively long time span between the beginning of one data set and the end of the other and spatial effects might also make the estimated results somewhat difficult to interpret. Thus using simultaneous spatial models might resolve some of those issues. But it is difficult to find an instrument variable to help identify the simultaneous equations. Also incorporating spatial effects into simultaneous equation models might be very challenging. These would be fruitful areas for future research. If we draw a diagram to see how neighborhood characteristics and change interact with foreclosures (see Figure 5.1) we find that change in percentage population below the poverty line is the only factors with mutually interactive relationship with foreclosures in Cuyahoga County. Other neighborhood characteristics and change variables only interact with foreclosures in a one way direction. However, we notice that the change in median housing value negatively affects foreclosures in Franklin County, but in Cuyahoga County it is not related to foreclosures. This is very interesting and deserves further investigation. In Cuyahoga County the change in percentage population below the poverty line yields opposite signs in the neighborhood effects analysis versus the impact analysis of foreclosures. It is negatively related to foreclosures when we examine them as precursors to the foreclosure rate. When foreclosures are used to explain neighborhood change variables (foreclosure rates in an earlier time period affect neighborhood change in a later time period) the effect of foreclosure rates is positive. Please refer to the previous detailed narratives for potential reasons explaining this phenomenon.

190

SERVICE

POVERTY

POVER_D

INCOME

HCOSTM BLACK COLLEGEH BLACK_D VACANCY TENURE

Foreclosure

MORTGAGE TENURE_D OWNER_D VACAN_D VALUE_D

191

COLL_D DIVOR_D FEMALE_D

Note: [1] The red arrows mean that the interaction works for both counties. [2] The thick arrows mean that the variables are mutual interactive with foreclosures in Cuyahoga County

Figure 5.1: Summary of the Interaction between Residential Mortgage Foreclosure and Neighborhood Characteristics and Change

CHAPTER 6

CONCLUSIONS, POLICY IMPLICATIONS AND FUTURE RESEARCH DIRECTIONS

As mentioned in previous chapters the relationship between residential mortgage foreclosure and neighborhood characteristics and change is very complicated and is related to many aspects of the issue. However, this research has helped us understand more about the relationship. The research methodology and results can provide useful insights to both theory and policy in foreclosure research. The research can also serve as a pilot study for larger future research projects. At the beginning the research proposed three research questions and several sets of hypotheses. The findings answered most of the questions, although not all hypotheses were supported. The first research question is whether and how neighborhood characteristics and change affect foreclosures. Our results indicate that neighborhood characteristics and change affect foreclosures in a profound manner. First we examined the spatial patterns of foreclosure rates and found that foreclosures rates are spatially autocorrelated across neighboring block groups. This indicates that foreclosures may be spatially contagious. We would also expect that foreclosures in one time period will be spatially autocorrelated with neighborhood indicators in neighboring block groups in the following time period. We also found strong heteroskedasticity in the data sets of both counties. The

192

neighborhood effects in the two study counties share some common attributes, although there are disparities between the results for the two counties as well. The independent variables were divided into three categories of neighborhood characteristics and change, demographic, economic and housing. These three categories all affect foreclosures in a similar way in both counties through the variables educational attainment (demographic), median household income (economic) and average housing cost burden (housing). There are some differences in the neighborhood effects on foreclosures between the two counties. The most important difference that is related to our hypothesis is that racial composition and turnover affect foreclosures only in Cuyahoga County. Change in median housing value has a positive effect on foreclosures in Franklin County but there is on effect in Cuyahoga County. The detailed explanation can be found in Chapter 5. The second question is whether and how foreclosures affect neighborhood change. Our results found that foreclosures in a previous time period do affect some neighborhood change indicators for the subsequent decade. Higher foreclosure rates are related to increases in the less educated population, female-led households and the poor population in neighborhoods. Foreclosure rates are negatively related to the percentage divorced population. The relationships between foreclosure rates and the change in homeownership rate, the change in housing vacancy rate, and the change in median housing value in Cuyahoga County have results that are not consistent with our expectations. We expected that foreclosures would hinder the increase in homeownership rates, but the research results indicate that foreclosure rates are positively related to the change in homeownership 193

rates. We also expected that foreclosures would aggravate housing vacancy issues in a neighborhood, but the results indicate that foreclosure rates are negatively related to the change in housing vacancy rate. We expected that foreclosures would decrease housing value appreciation or speed up depreciation, but the results indicate that foreclosure rates are positively related to the change in median housing values. While data issues may be a problem, revitalization and gentrification of declining neighborhoods and investor behavior (subdivision, renovation or flipping of the foreclosed properties) might help explain the research results as well. In the future when data from more geographic areas are available more research can be done to test whether the effects happen in other places and what contextual variables affect the relationships. At the same time a spatial

simultaneous equation model might be constructed and estimated with the same dataset. However, it will be very challenging to identify the estimation techniques related to the spatial simultaneous equation models. Resolving identification problems associated with simultaneous equations becomes more difficult when there are a large number of related variables and non-recursive causal relationships in the model. The third question asked at the beginning of the research is related to developing a model that can separate the two effects. The use of panel data made it possible to separate the effect of neighborhood characteristics on foreclosures from the effect of foreclosures on neighborhoods, and the use of spatial analysis, spatial regression, heteroskedasticity correction and Seemingly Unrelated Regression (SUR) contributed significantly to the research methodology on this topic. However, even if we use panel data (foreclosures in 1983-1989 affect neighborhood change from 1990 to 2000; and then neighborhood characteristics in 2000 and change from 1990 to 2000 affect foreclosures in 2001-2004) 194

other factors, such as policy change, omitted variables, and collinearity between the variables, will affect the estimation results. As indicated above, a goal for future research should be to combine the separate effects in a simultaneous equation model. When looking at the sets of hypotheses in detail we found that the findings supported some of the initial expectations but not others. The research finds that foreclosures concentrate in certain neighborhoods over time and strong spatial autocorrelation in foreclosure rates exists. These findings support our expectations. In terms of the interaction between foreclosures and change in housing value the research did not support the idea that housing value depreciation contributes to foreclosures, although change in housing value does negatively affect foreclosures in Franklin County. This means that the drops in housing value in the earlier time period are associated with increases in the foreclosure rates as we would expect. The SUR found that foreclosure rates in the earlier time period significantly and positively contribute to the change in median housing value in a neighborhood in Cuyahoga County. This is very different from what we expected. Therefore, the interaction between housing value and foreclosures at a neighborhood level is more complex than that the literature indicates and needs further investigation. When exploring the effect of racial composition on foreclosure rates the research found that percentage black population and its change affect foreclosures only in Cuyahoga County. In Franklin County, racial composition does not directly contribute to foreclosure rates. On the other hand, the SUR found that foreclosures do not affect the change in racial composition of a neighborhood in Cuyahoga County. Therefore, the 195

research does not support our initial hypothesis that racial factors would contribute to foreclosures in both counties (it is not true in Franklin County), nor do the findings support our expectations that foreclosures affect racial turnover of a neighborhood. So the findings of the relationship between racial composition and foreclosures are not consistent with research by Baxter and Lauria (2000) in New Orleans. This might because some place-related characteristics are not controlled in either or both of the studies, thus the results are different. For example, New Orleans might also be more racially segregated than Cuyahoga County, and thus foreclosure will acerbate the segregation. It is important that future research consider multiple geographic areas and their racial contexts in order to shed more light on this issue. For both counties median household income is positively related to foreclosures. This does not support our initial hypothesis that median household income would be negatively related to foreclosures. Perhaps the increase in housing cost burden has offset the benefits of gaining income, thus higher income will be related to higher foreclosure rates. On the other hand, foreclosure rates do not affect the change in income in our Cuyahoga County analysis. Housing vacancy rates in an earlier time period are significantly related to foreclosure rates in Franklin County in the later time period in a positive way, as we expected. But foreclosure rates in the earlier period are negatively associated with the change in the housing vacancy rate in Cuyahoga County during the subsequent decade. The two counties are different in terms of demographic, economic and housing characteristics and change. Therefore the interaction between residential mortgage foreclosure and neighborhood characteristics and change is different, although there are 196

some common findings in both counties. In particular, the economic and racial context of the two counties underlies some of the differences that we have discovered. The research has answered most of the research questions, and some results indicate important directions for future research.

197

Policy Implications
Concern about foreclosure and its impact on homeowners and neighborhoods has promoted research and policy innovations in recent years. One of the purposes of this project is to provide information to policy makers to help in understanding the relationship between residential mortgage foreclosure and neighborhood characteristics and change. Therefore, the research findings have significance in helping address foreclosure issues. For both counties foreclosures have concentrated in certain neighborhoods. These are usually inner city areas, although there are some scattered cases stretching to the suburbs, especially in later years. Therefore policy makers should pay particular attention to those neighborhoods with clustered foreclosure cases. However, since there are many factors affecting foreclosures and the factors vary somewhat between counties, each of those neighborhoods should have tailored programs for foreclosure prevention. For both counties, educational attainment is one of the demographic factors related to foreclosure rates. Policy makers can try to promote educational attainment and it can be incorporated into community development policies. If the effect of educational attainment on foreclosures lies in the fact that more educated people do not easily become the victims of predatory lending, then financial education to the residents might help prevent foreclosures, and all neighborhood residents would benefit, especially in those neighborhoods with low educational attainment. The research found that decreasing housing cost burden in a neighborhood is related to decreasing foreclosure rates. Policy makers might initiate funds to help alleviate housing cost burdens, especially for highly cost burdened homeowners in high cost 198

burden neighborhoods. Decreasing housing vacancy rates in a neighborhood is also related to decreasing foreclosure rates and also helps diminish the clustering of foreclosed homes. Policy can encourage redevelopment for areas with high vacancy rates, or encourage real estate investors to purchase vacant properties. This latter policy would have to guard against flippers and predatory lenders who could simply make the problem worse. The goals of all those policies cannot be achieved in a short time and there might be many obstacles in implementing the policies. However, the research provides a foundation for policy makers to refer to when making policy changes and it argues for policies aimed at neighborhoods, not just policies aimed at individual homeowners. This is particularly important because of the clear spatial clustering and probable contagion effect in foreclosures. As the impact of foreclosure on neighborhood change variables indicates, change in female headship rate and change in homeownership rate are positively related to foreclosures in Cuyahoga County. These relationships could lead to increased involuntary income segregation or concentration of the low income population in neighborhoods with high foreclosures (and thus weakens housing appreciation and other market indicators). Policy makers can focus on the neighborhoods with an increasing percentage of female headship rate and/or an increase in percentage population below the poverty line with pre-foreclosure prevention and post foreclosure remedial programs (see Figure 6.1 and Figure 6.2 for the change in female headship rate and the change in percentage population below the poverty line). However, this does not mean that we should not put any efforts into other neighborhoods.

199

Generally speaking foreclosure prevention should not be the same in all places. Each neighborhood has unique characteristics and patterns of change and each county has a unique economic and demographic context. Therefore, when we seriously work to prevent foreclosures we need to have an individualized program for each neighborhood that is vulnerable to foreclosures. The research has provided some specified findings in terms of what neighborhood characteristics and change variables will affect foreclosure rates, and what neighborhood change variables are affected by foreclosures. Hopefully the significance of the research for policy making can be recognized in this way.

200

Change in Femaile Headship Rate (% points)

-30.59% - 0.0000 0.01% - 10.00% 10.01% - 20.00% 20.01% - 30.00% 30.01% - 50.00%

201

Figure 6.1: Change in Female Headship Rate in Cuyahoga County (19902000, % points)

Change in Percentage Population Below the Poverty Line (% points)

-0.4590 - 0.0000 0.0001 - 0.1000 0.1001 - 0.2000 0.2001 - 0.3000 0.3001 - 0.5000

202

Figure 6.2: Change in Percentage Population below the Poverty Line in Cuyahoga County (% points)

Future Research Directions

Since this research explores the mutual interaction between residential mortgage foreclosure and neighborhood characteristics and change, the research results can be used as the foundation for a Structural Equation Model that incorporates the separate effects into one model. Thus the methodology can be changed to see how consistent the results will be. Ideally spatial effects would be considered although this makes the methodological task even more challenging. This should be the first step in future research on the topic. However, when exploring the impact of foreclosures on neighborhood change, a spatial simultaneous model can be separately constructed, if feasible, thus resolving some issues in the current SUR model (such as the omitted variables, non-recursive relationships, and others). Another path to use in studying the impact of foreclosures on neighborhood change could focus on using spline regression models to capture the threshold effects. These possible effects suggest that the relationships are not continuous, but rather that there is little effect from a particular variable until a threshold is reached and then the effect is relatively large. For example, it would be valuable to find out at what point foreclosures will contribute to neighborhood change positively, or negatively, or at what point neighborhood characteristics become important to foreclosures. As far as other methodological issues go, future research should try to find a viable approach for running the spatial regression models controlling for both heteroskedasticity and spatial autocorrelation at the same time, and then compare the results with those in this research. The purpose of the comparison is to see if separately controlling for heteroskedasticity and spatial autocorrelation yields similar results as running the model 203

by controlling the two problems simultaneously. Ideally we should also pay attention to other issues associated with the spatial regression models, such as omitted variables, data improvements, and multicollinearity. Many of the research findings are very interesting, but need further investigation. One of the future research directions is to find out why some neighborhood characteristics and changes contribute to foreclosures and others do not. And on the other hand, why certain neighborhood change variables are related to foreclosures but others are not. When we want to know the relationship of an individual neighborhood factor and foreclosures we can only focus on one factor, such as the relationship between racial turnover and foreclosure, the relationship between the female headship rate and foreclosure, or the relationship between the homeownership rate and foreclosure. The biggest problem in this research lies in data and time limitations. Sheriffs real estate sales data and court records can be easily accessed through many approaches, but they usually do not have the data format that an academic researcher needs. To rebuild the data consumes time. Therefore, given time and budget, future research can use those data and merge them with multiple years Home Mortgage Disclosure Act (HMDA) data and county property transaction data to find out how loan and borrowers characteristics, as well as housing attributes at the loans origination can affect foreclosure. This will be much more accurate than simulations of default probability using HMDA data at the loan origination such as those performed by Ambrose and Sanders (2002). The research can expand to using data from other states in the U.S. to find out the relations between real mortgage default and loan and borrowers characteristics at the loan origination. The result will provide more reliable underwriting standards for lenders. 204 In addition,

research should examine the relationship between foreclosure filings and sheriff sale properties. What happens to the properties that are foreclosed but do not go to sheriffs sales and do they have different relationships with neighborhood variables? Another aspect of the future research is to track the addresses of the borrowers whose properties were foreclosed and conduct a survey to explore the reasons why they defaulted, the impact of the default on them and where they moved. This will be very helpful to learn how borrower characteristics affect default decisions and foreclosure risks. The tracking of addresses includes both tracking where the borrowers go after foreclosure and civic real estate sales, and also who buys the foreclosed properties and what they do with them. The negative impact of foreclosure on a homeowner is very significant. After losing their homes borrowers will have different tenure and moving selections. Whether they choose to rent or buy again (and over what time period) and where they move will affect neighborhood changes greatly, in both their previous neighborhoods and their future neighborhoods. There are a variety of other questions about those who have defaulted and lost their homes to foreclosure. There is no

assistance program helping them recover from the financial and emotional stress from foreclosure. The other interesting set of questions refers to those who bought the foreclosed properties. What are the buyers characteristics and what impact do they have on the neighborhoods in which the properties are located? Other questions, such as how foreclosure affects childrens school outcomes and individual development can also be explored. All those questions are very challenging and interesting but no literature has addressed them. 205

Another direction for the future research is to find out why lenders choose foreclosure, not other alternatives to resolve a troubled mortgage. Default decisions are usually made by borrowers. But it is up to lenders to choose ways to resolve a troubled loan. Is the decision based on cost effectiveness, or other reasons? Is there any racial or geographic bias when lenders choose whose mortgage will be foreclosed, whose mortgage will be modified, when there will be foreclosure sales, or when other alternatives will be preferred? Since the research in foreclosure and its impact on borrowers, lenders and the neighborhoods is not mature, there are many directions for research related to foreclosures. The research reported here provides a first step and thus contributes to the scanty literature in this field.

206

APPENDIX A

FORECLOSURE PROCEDURES

207

State Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois

Security Instrument Mortgage Trust Deed Trust Deed Mortgage Trust Deed Trust Deed Mortgage Mortgage Trust Deed Mortgage Security Deed Mortgage Trust Deed Mortgage

Judicial

Non-Judicial

Initial Step Publication Notice of Default Notice of Sale Complaint Notice of Default Notice of Default Complaint Complaint Notice of Default Complaint

Process Period (Days) 49-74 105 102 70 117 91 62 170-210 47 135 37 220 150 300

Sale Publication (Days) 21 65 41 30 21 14 NA 60-90 18 NA 32 60 45 NA

Redemption Period (Days) 365 365* None 365* 365* 75 Court Decides None None None None None 365 90

Sale Trustee Trustee Trustee Trustee Trustee Trustee Court Sheriff Trustee Court Trustee Trustee Trustee Court

Deficiency Allowed Allowed Allowed Allowed Prohibited Allowed Allowed Allowed Allowed Allowed Allowed Allowed Allowed Allowed

Comments Judicial not common Judicial as last alternative Judicial not common Both are used equally Judicial not common Judicial not common Judicial only Judicial only Trustee Sale only Judicial only Judicial not common Both used equally Trustee Sale more common Judicial only

208

Publication Publication Notice of Default Complaint

Continued

Table A.1: Legislation Requirement of Mortgage Foreclosure in Different States in the U.S.

Table A.1 Continued

Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada

Mortgage Mortgage Mortgage Mortgage Mortgage Mortgage Trust Deed Mortgage Mortgage Mortgage Trust Deed Trust Deed Trust Deed Mortgage Trust Deed

Complaint Petition Complaint Complaint Petition Complaint Notice Complaint Publication Publication Publication Publication Notice Petition Notice of Default

261 160 130 147 180 240 46 75 60 90-100 90 60 150 142 116

120 30 21 NA NA 30 30 41 30 7 30 10 50 NA 80

None 20 365 365 None 90 Court Decides None 30-365 1825 None 365 None None None

Sheriff Sheriff Sheriff Court Sheriff Court Court Court Sheriff Sheriff Trustee Trustee Trustee Sheriff Trustee

Allowed Allowed Allowed Allowed Allowed Allowed Allowed Allowed Allowed Prohibited Prohibited Allowed Prohibited Allowed Allowed

Judicial only Trustee Sale Voluntary Judicial only Judicial only Judicial only Judicial only Judicial only Judicial only Non-Judicial only Non-Judicial more common Non-Judicial more common Non-Judicial more common Trustee Sale more common Judicial only Trustee Sale more common

209

Continued

Table A.1 Continued

New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas

Mortgage Mortgage Mortgage Mortgage Trust Deed Mortgage Mortgage Mortgage Trust Deed Mortgage Mortgage Mortgage Mortgage Trust Deed Trust Deed

Notice of Sale Complaint Complaint Complaint Notice Hearing Complaint Complaint

59 270 180 445 110 150 217 186 150 270 62 150 150 40-45 27

24 NA NA NA 25 NA NA NA 30 NA 21 NA 23 20-25 NA

None 10 30-270 None None 180-365 None None 180 None None None 30-365 730 None

Trustee Sheriff Court Court Sheriff Sheriff Sheriff Sheriff Trustee Sheriff Trustee Court Sheriff Trustee Trustee

Allowed Allowed Allowed Allowed Allowed Prohibited Allowed Allowed Allowed Allowed Allowed Allowed Allowed Allowed Allowed

Non-Judicial only Judicial only Judicial only Judicial only Non-Judicial more common Judicial only Judicial only Judicial more common Trustee Sale more common Judicial only Non-Judicial more common Judicial only Judicial more common Non-Judicial only Non-Judicial more common

Complaint Notice of Default Complaint

210

Publication Complaint

Complaint Publication Publication

Continued

Table A.1 Continued

Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming

Trust Deed Mortgage Trust Deed Trust Deed Trust Deed Mortgage Mortgage

Notice of Default Complaint

142 95 45 135 60-90 290 60

NA NA 14-28 90 30-60 NA 25

Court Decides 180-365 None None None 365 90-365

Trustee Court Trustee Trustee Trustee Sheriff Sheriff

Allowed Allowed Allowed Allowed Prohibited Allowed Allowed

Non-Judicial only Judicial only Trustee Sale more common Trustee Sale more common Trustee Sale only Judicial more common Non-Judicial more common

Publication Notice of Default Publication Complaint Publication

211

Major Source: www.realtytrac.com

Foreclosure Procedure in Ohio

Judicial Foreclosure Available: Yes Non-judicial Foreclosure Available: No The Ohio standard mortgage provides for a conditional transfer of title to the lender. If the borrower pays the principal and interest; performs the obligations of the mortgage, including payment of taxes, assessments and hazard insurance and does not commit waste, then the borrower will obtain full title at the end of the mortgage term. Ohio mortgages must be foreclosed by court action.
Lawsuit The lender must sue the borrower in the county where the property is located. The lender must ask the court to foreclose the mortgage and order a sale of the property. Sale Procedures When land is to be sold under a foreclosure order, the officer conducting the sale shall call upon three disinterested freeholders of the county to give an estimate of the value of the property. A copy of the appraised value must be left with the court clerk. The property must forthwith be offered for sale at a price of not less than two-thirds of the appraisement. Advertising The land will not be sold until the officer handling the foreclosure gives public notice of the sale by advertising the time and place of the sale at least 30 days in advance of the sale. The advertisements will be sufficient if they are published once a week for three consecutive weeks before the day of the sale, with each ad on the same day of the week. Method of Sale The sheriff handles foreclosure sales in Ohio . The officer will sell to the highest bidder at the time and place indicated in the advertised notice. The sale must take place at the courthouse. If the bidder fails to pay the price, the court "shall punish as for contempt any purchaser of real property who fails to pay the purchase money therefore." If there is no sale for lack of bidders, then the court may order a new appraisement and order the sale for one-third in cash and the balance later. Confirmation The sheriff returns the writ of execution indicating that a sale was made to the court, which upon examination of the sale proceedings to make sure they were in conformity with the law and with the court orders, enters into its records a confirmation

212

of the legality of the sale and directs the officer who made the sale to create and deliver the purchaser a deed for the property.
Special Procedures If the property is in danger of being damaged the court may appoint a receiver to take charge of it. Deficiency A deficiency judgment may be lender along with the order commanding a foreclosure sale. The deficiency is void two years after the foreclosure sale is confirmed. However, the enforcement may continue if the debtor signs an agreement to postpone the enforcement past two years. Redemption The debtor can redeem by paying the amount of the judgment plus costs and interests up until the confirmation of sale, but not afterward.

Source: http://www.defaultresearch.com

213

APPENDIX B

TOTAL SHERIFFS DEEDS AT THE SCHOOL DISTRICT LEVEL IN FRANKLIN COUNTY

214

SCHOOL DISTRICT NAME23 BEXLEY CSD CANAL WINCHESTER LSD COLUMBUS CSD DUBLIN CSD GAHANNA-JEFFERSON CSD GRANDVIEW HEIGHTS CSD GROVEPORT MADISON LSD HAMILTON LSD HILLIARD CSD PLAIN LSD REYNOLDSBURG CSD SOUTH-WESTERN CSD UPPER ARLINGTON CSD WESTERVILLE CSD WHITEHALL CSD WORTHINGTON CSD PICKERINGTON LSD LICKING HEIGHTS LSD JONATHAN ALDER LSD MADISON-PLAINS LSD NEW ALBANY-PLAINS LSD OLENGANTY LSD TEAYS VALLEY LSD

Code 1997
2501 2502 2503 2513 2506 2504 2507 2505 2510 2508 2509 2511 2512 2514 2515 2516 2307 4505 4902 4904 2508 2104 6503 2 379 8 15 21 4 15 1 7 48 5 18 11 17 -

1998 5 699 15 10 1 33 11 21 5 14 111 2 29 18 15 -

1999 5 4 648 10 23 31 16 22 3 10 128 7 29 17 11 2 -

2000 2 10 892 13 18 2 50 33 42 5 14 143 3 34 27 12 3 -

2001 3 11 936 16 28 68 28 41 3 19 178 3 42 18 22 6 -

2002 5 25 1192 25 29 80 32 48 5 19 203 7 49 27 15 10 -

2003 2 21 1402 30 43 2 111 39 68 9 31 243 13 56 25 24 3 18 -

2004 11 35 1647 19 58 4 127 71 88 18 36 356 9 97 52 31 7 30 -

Total

35 0.30 106 0.90 7795 65.85 136 1.15 224 1.89 9 0.08 521 4.40 234 1.98 345 2.91 49 0.41 150 1.27 1410 11.91 49 0.41 354 2.99 195 1.65 147 1.24 10 0.08 69 0.58 -

215

Table B.1: Total Sheriffs Deeds at the School District Level in Franklin County (1997-2004, Note: 11838 total cases and 6 cases cant be identified at the school district level)

APPENDIX C

SPATIAL AUTOCORRELATION OF SELECTED VARIABLES

216

Figure C.1: The Local Spatial Autocorrelation between Female Headship Rate in 2000 and Foreclosure Rate (20012004) in Franklin County

217

Figure C.2: The Local Autocorrelation between Median Household Income in 2000 and Foreclosure Rate (20012004) in Franklin County

218

Figure C.3: The Local Autocorrelation between Housing Cost Burden with a Mortgage in 2000 and Foreclosure Rate (20012004) in Franklin County

219

Figure C.4: The Local Autocorrelation between Median Housing Value of OwnerOccupied Housing Units in 2000 and Foreclosure Rate (20012004) in Franklin County

220

Figure C.5: The Local Autocorrelation between Housing Vacancy Rate in 2000 and Foreclosure Rate (20012004) in Franklin County

221

Figure C.6: The Local Autocorrelation between Homeownership Rate in 2000 and Foreclosure Rate (20012004) in Franklin County

222

223

Figure C.7: The Local Spatial Autocorrelation between Female Headship Rate in 2000 and Foreclosure Rate (20012004) in Cuyahoga County

224

Figure C.8: The Local Autocorrelation between Median Household Income in 2000 and Foreclosure Rate (20012004) in Cuyahoga County

225

Figure C.9: The Local Autocorrelation between Housing Cost Burden with a Mortgage in 2000 and Foreclosure Rate (20012004) in Cuyahoga County

226

Figure C.10: The Local Autocorrelation between Median Housing Value of Owner-Occupied Housing Units in 2000 and Foreclosure Rate (20012004) in Cuyahoga County

227

Figure C.11: The Local Autocorrelation between Housing Vacancy Rate in 2000 and Foreclosure Rate (20012004) in Cuyahoga County

228

Figure C.12: The Local Autocorrelation between Homeownership Rate in 2000 and Foreclosure Rate (20012004) in Cuyahoga County

APPENDIX D

SUR MODEL RESULTS

229

Dependent Variable ROOT MSE () INTERCEPT FORECLOSURE (8389)

BLACK_D 0.1007 0.1556* 0.1245

HH_D 0.5611 -5.9269 0.1368

INCOME_D UNEMPLOY_D 0.2666 1.3293 -0.1131 0.0502 -0.0969 0.0586

MNGMT_D 0.0814 0.5746 -0.0787

SERV_D 0.0649 -0.0180 0.0390

OWNER_D 0.3580 -0.2668 0.5291

Neighborhood Characteristics Demographic BLACK90 MINORITY90 FEMALEKID90 DIVORCE90 COLLEGEH90 Economic INCOME90 UNEMPLOY90 SERVICE90 MNGMT90 POVERTY90 2.07e-7 -0.0374 -0.0478 0.0325 -0.0940
+

0.0707 -0.1830* -0.0247 0.0956 -0.1392***

-0.1498 0.0753 -0.0641 1.0426* 0.4006

+

0.1717 -0.2557 0.1207 -0.3568 0.4419*** -0.00001*** -0.3225+ -0.0091 0.5247** 1.1051***

0.0126 0.0151 0.1147** -0.0742 -0.0910*** 3.63e-7+ -0.9598*** 0.0343 0.0339 0.1195***

-0.0084 0.0122 -0.1989*** -0.2018** 0.3399*** 1.10e-7 -0.0183 0.0356 -0.8970*** 0.1123**

0.0600 -0.0180 0.0872*

0.1473 -0.1794 0.1268 -0.1953 0.0508

230

-1.72e-6 -0.3259 0.3180 -0.7804

+

-5.07e-7* 0.0437 -0.9449*** 0.0119

3.32e-6* -0.1799 0.2174 -0.1022 0.0185 Continued

-0.1742

Table D.1: ITSUR Estimate Results (where FORECLOSURE is not significant)

Table D.1 Continued

Housing YEARS90 VALUE90 VACANCY90 TENURE90 MORTGAGE90 -2.04e-7 0.2106** -0.0666* -0.0284 0.1602 0.0007 -1.11e-6 0.2779 -0.0018*** 1.53e-6*** -0.0880 0.4421*** -0.0477 0.00009+ -9.35e-8 0.0967* -0.0225 0.0164 -0.0001 6.75e-7*** -0.0002 0.0016 -0.0378* 0.0033 0.0001+ -2.38e-7** 0.0944
+

-0.0002 -5.74e-7 -0.8417** -0.5961*** 0.0880

Change in Census Place Characteristics Demographic PBLACK_D PCOLL_D PDIVOR_D PFEMALE_D PHH_D Economic PINC_D PUNEMPLOY_D -0.0058 -0.0880 -0.3259 -4.0054 -0.0526 -0.8215 0.0936 -0.1036 -0.0136 -0.2433 -0.1744 1.3717 1.1124*** -0.4186 -0.4131 -0.2475 0.3125 0.0448 1.6735 -0.2587 1.2331 0.0930 -0.9977 0.7695 -0.0021 -0.2124 0.3211 -0.1725 0.0163 0.1003 0.4316 -0.2409 -0.4667 0.0239 -0.1197 2.1587 -0.0102 0.1257 1.8106

231

Continued

Table D.1 Continued

PPOVER_D PMNGMT_D PSERV_D Housing PTENURE_D POWNER_D PVALUE_D PVACAN_D

-0.4732 0.1819* 0.1597 0.4972 -0.3872 0.0241

2.8284 -0.2665 -2.1254

0.1346 0.2160 -0.3965 1.4083

-0.0142 -0.0011 0.1749 0.0389 -0.0338 -0.0814

0.2956 0.5423*** 0.1827 0.2790 -0.0899 0.0071 0.3614 -0.1205** 0.0165 0.0792 0.0995

0.2399 -0.7055 1.3896 -0.6942 0.1406 -0.7555

1.2556 0.2966 -4.5057

-0.8065 0.0762 -1.9122

232

*** 0.001 significant level * 0.05 significant level

** 0.01 significant level + 0.10 significant level

APPENDIX E

THE GEOGRAPHIC DISTRIBUTION OF SELECTED NEIGHBORHOOD CHANGE INDICATORS AT THE BLOCK GROUP LEVEL IN FRANKLIN AND CUYAHOGA COUNTIES

233

Change in % Divorced Population (% points)

-20.75% - -0.01% 0.0000 - 5.00% 5.01% - 10.00% 10.01% - 15.00% 15.01% - 30.00%

234

Figure E.1: Change in % Divorced Population in Cuyahoga County (19902000, % points)

Change in % Population with College or Higher Degrees (% points)

-27.14% - -0.01% 0.0000 - 5.00% 5.01% - 15.00% 15.01% - 25.00% 25.01% - 52.00%

235

Figure E.2: Change in % Population with College degrees or Higher in Cuyahoga County (19902000, % points)

Change in Homeownership Rate (% points)

-100.00% - -65.00% -64.99% - -35.00% -34.99% - 0.0000 0.01% - 25.00% 25.01% - 55.00%

236

Figure E.3: Change in Homeownership Rate in Cuyahoga County (19902000, % points)

Change in Housing Vacancy Rate (% points)

-35.53% - -15.00% -14.99% - 0.0000 0.01% - 33.00% 33.01% - 66.00% 66.01% - 100.00%

237

Figure E.4: Change in Housing Vacancy Rate in Cuyahoga County (19902000, % points)

Change in Median Housing Value (% points)

-100.00% - -50.00% -49.99% - 0.0000 0.01% - 400.00% 400.01% - 800.00% 800.01% - 1200.00%

238

Figure E.5: Change in Median Housing Value in Cuyahoga County (19902000, % points)

BIBLIOGRAPHY

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NOTES

Burnout means the tendency of mortgage pools in mortgage-related securities to become less sensitive to interest rate as they tend to maturity. The older the pool, the more burnt out is the sensitivity to interest rate changes. In a burnout refinancing the mortgage will not bring more benefits than before the burnout, thus the borrowers missed previous good opportunities to refinance and have a higher tendency to default. As suggested by Burridge (1980), the Largange Multiplier principle can be applied for the test for spatial error dependence can be based on. The test is:
2

LM error = (

e 'We

where tr represents the matrix trace operator, 2 is a maximum likelihood estimate for the error variance (i.e., 2=ee/N). The LM-error follows an asymptotic 2(1) distribution under the null hypothesis of no spatial dependence (H0: =0). To test for the substantive spatial dependence, Anselin (1988) suggested an alternative Largrange Multiplier test:
3

) / tr (W W + W 2 )

LM lag =

eWy (WXb)MWXb / + tr (W W + W 2 ) 2 2

where Wy is the spatial lag, b is vector of the OLS estimators for parameters , M is a projection matrix, M=I-X(XX)-1X. The LM-lag also follows an asymptotic 2(1) distribution under the null hypothesis of no spatial dependence (H0: =0). The robust LM tests are robust to misspecification of the other source of spatial dependencei.e. the robust LM error test is robust to any spatial lag dependence that may be present and vice versa (i.e. tests for error dependence in presence of missing lag), the robust LM lag test is robust to any spatial error dependence that may be present (tests for lag dependence in presence of missing error). The 1990 Median Household Income has been converted to the 2000 constant dollar values based on the deflator. The Median Housing Value of owner-occupied housing units has been converted to the 2000 constant dollar values based on the deflator. Among the available parcel datasets (1988, 1994, 1997, 2000, 2004), 1988 Cuyahoga Parcel data are the closest to capture most of the 9,185 Sheriffs Deeds in 19831989. The Median Household Income has been converted to the 2000 constant dollar values based on the deflator. The Median Housing Value of owner-occupied housing units has been converted to the 2000 constant dollar values based on the deflator.
10 9 8 7 6 5 4

The foreclosure data in this time period are not available in Franklin County.

252

Heteroskedasticity-Robust OLS adjustment is used to correct for heteroskedasticity in the OLS regression, base on Whites standard errors. Heteroskedasticity-robust (H-Robust) standard errors are very popular in applied econometrics, and in practice they are more often used to deal with heteroskedasticity than Weighted Least Squares. Please refer to textbooks in econometrics for detailed procedures of conducting the adjustments.
12

11

R2 in a spatial model is called Pseudo R-square, which is defined as the ratio of the variance of the predicted values over the variance of the observed values for the dependent variable. Therefore it is not directly comparable with the results from the OLS regression. Log Likelihood is appropriately comparable between spatial models and OLS models. Please refer to Spatial Econometrics: Methods and Models (Luc Anselin, 1989) for the detailed statistic description of the log likelihood functions in spatial models.

13

The Jarque-Bera test is a goodness-of-fit measure of departure from normality, based on the sample kurtosis and skewness. The test statistic JB is defined as

14

JB =

(n k ) 2 ( K 3) 2 (S + ) 6 4

where S is the skewness, K is the kurtosis, n is the number of observations, and k is the number of estimated coefficients used to create the series. The statistic has an asymptotic chi-squared distribution with two degrees of freedom and can be used to test the null hypothesis that the data are from a normal distribution; since samples from a normal distribution have an expected skewness of 0 and an expected kurtosis of 3. As the equation shows, any deviation from this increases the JB statistic. The first step of Breusch-Pagan test is to obtain the residuals of the estimated regression equation. Then use the squared residuals as the dependent variable in a secondary equation that includes all the independent variables suspected of being related to the error term:
15

(ei ) 2 = 0 + 1 Z 1i + L + p Z pi + i .
Afterwards use a Chi-square test to test that all the coefficients in this equation are zero.
16

As in a Breusch-Pagan test the first step of White test is to obtain the residuals of the estimated regression equation. Then use the squared residuals as the dependent variable in a secondary equation that includes all the independent variables from the original regression equation:

(ei ) 2 = 0 + 1 X 1i + L + p X pi + i
Afterwards use a Chi-square test to test that all the coefficients in this equation are zero.
17

Please refer to Spatial Econometrics: Methods and Models (Luc Anselin, 1989) for the detailed statistic description of the log likelihood functions in spatial models.

The Jarque-Bera test is a goodness-of-fit measure of departure from normality, based on the sample kurtosis and skewness. The test statistic JB is defined as

18

JB =

(n k ) 2 ( K 3) 2 (S + ) 6 4

where S is the skewness, K is the kurtosis, n is the number of observations, and k is the number of estimated coefficients used to create the series. The statistic has an asymptotic chi-squared distribution with two

253

degrees of freedom and can be used to test the null hypothesis that the data are from a normal distribution; since samples from a normal distribution have an expected skewness of 0 and an expected kurtosis of 3. As the equation shows, any deviation from this increases the JB statistic. The first step of Breusch-Pagan test is to obtain the residuals of the estimated regression equation. Then use the squared residuals as the dependent variable in a secondary equation that includes all the independent variables suspected of being related to the error term:
19

(ei ) 2 = 0 + 1 Z1i + L + p Z pi + i .
Afterwards use a Chi-square test to test that all the coefficients in this equation are zero.
20

As in a Breusch-Pagan test the first step of White test is to obtain the residuals of the estimated regression equation. Then use the squared residuals as the dependent variable in a secondary equation that includes all the independent variables from the original regression equation:

(ei ) 2 = 0 + 1 X 1i + L + p X pi + i
Afterwards use a Chi-square test to test that all the coefficients in this equation are zero.
21

Iterated SUR is equivalent to Maximum Likelihood (ML) estimation. Maximizing likelihood means minimizing the determinant of the error covariance matrix. In the first step of ITSUR, the error covariance matrix of the OLS estimation is used. In the following steps the error covariance matrix of the previous step SUR estimation is used. The rest of the results (where FORECLOSURE is not significant) are in the appendix D (Table D.1). CSD: Columbus School District; LSD: Local School District.

22 23

254