barry merchant's presentation to caar - 10-26-2011

8/3/2019 Barry Merchant's presentation to CAAR - 10-26-2011

http://slidepdf.com/reader/full/barry-merchants-presentation-to-caar-10-26-2011 1/31

Virginia Housing Development Authority

Housing Market Update

Charlottesville Area Association of RealtorsOctober 26, 2011



1vhda.com | 800-227-VHDA

Presentation Outline

1. Housing market overview – Where we are

– Constraints on demand

2. Mortgage market issues – Resolution of foreclosures and distressed inventory

– Management of new lending risks

3. Addressing obstacles

– Leveling the playing field – Rebuilding confidence

– Helping first-time buyers




1. Housing Market OverviewWhere We Are




Existing home sales in Virginia appearto be re-stabilizing at a 13-year low.

Source: Virginia Association of Realtors (VAR)

Virginia Existing Home Sales4-Quarter Rolling Average

15,000

20,000

25,000

30,000

35,000

40,000

9 8 - 1 9 8

- 3 9 9

- 1 9 9

- 3 0 0

- 1 0 0

- 3 0 1

- 1 0 1

- 3 0 2

- 1 0 2

- 3 0 3

- 1 0 3

- 3 0 4

- 1 0 4

- 3 0 5

- 1 0 5

- 3 0 6

- 1 0 6

- 3 0 7

- 1 0 7

- 3 0 8

- 1 0 8

- 3 0 9

- 1 0 9

- 3 1 0

- 1 1 0

- 3 1 1

- 1 1 1

- 3

Calendar Year Quarter

3rd Qtr

2005

2nd Qtr

2008

- 47%

2nd Qtr

2011

Federal

Home

Buyer Tax

Credit




Both the Northern Tier and Downstatemarkets are searching for a new bottom.


Virginia Existing Home Sales4-Quarter Rolling Average

5,000

10,000

15,000

20,000

25,000

9 9 - 1 9 9

- 3 0 0

- 1 0 0 - 3

0 1 - 1

0 1 - 3

0 2 - 1

0 2 - 3

0 3 - 1

0 3 - 3

0 4 - 1

0 4 - 3

0 5 - 1

0 5 - 3

0 6 - 1

0 6 - 3

0 7 - 1

0 7 - 3

0 8 - 1

0 8 - 3

0 9 - 1

0 9 - 3

1 0 - 1

1 0 - 3

1 1 - 1

1 1 - 3


2nd Qtr

2005

1st Qtr2008

2nd Qtr

2011- 49%

4th Qtr

2005

Northern Tier

Downstate Regions - 46%

Federal

Home

Buyer

Tax

Credit




Home sales trends in Charlottesville areclosely tracking other downstate regions.


Existing Home Sales(4 quarter rolling averages)

400

500

600

700

800

2 0 0 7

Q 4

2 0 0 8

Q 1

2 0 0 8

Q 2

2 0 0 8

Q 3

2 0 0 8

Q 4

2 0 0 9

Q 1

2 0 0 9

Q 2

2 0 0 9

Q 3

2 0 0 9

Q 4

2 0 1 0

Q 1

2 0 1 0

Q 2

2 0 1 0

Q 3

2 0 1 0

Q 4

2 0 1 1

Q 1

2 0 1 1

Q 2

2 0 1 1

Q 3

8,000

10,000

12,000

14,000

16,000

Charlottesville

Metro Area

All Downstate

Regions




Area home prices are tracking statewidechanges, and have not yet found a bottom.

Source: Federal Housing Finance Agency (FHFA)

Annual Change in FHFA Existing Home Price Index

-10%

-5%

0%

5%

10%

15%

20%

25%

2 0 0 0

- 2

2 0 0 0

- 4

2 0 0 1

- 2

2 0 0 1

- 4

2 0 0 2

- 2

2 0 0 2

- 4

2 0 0 3

- 2

2 0 0 3

- 4

2 0 0 4

- 2

2 0 0 4

- 4

2 0 0 5

- 2

2 0 0 5

- 4

2 0 0 6

- 2

2 0 0 6

- 4

2 0 0 7

- 2

2 0 0 7

- 4

2 0 0 8

- 2

2 0 0 8

- 4

2 0 0 9

- 2

2 0 0 9

- 4

2 0 1 0

- 2

2 0 1 0

- 4

2 0 1 1

- 2


Charlottesville Metro Area

Virginia




1. Housing Market OverviewConstraints on Demand




The Fed’s efforts to keep mortgage rates at

historic lows have not revived the market.

Source: Federal Housing Finance Agency (FHFA)

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

J a n - 9 4

J a n - 9 5

J a n - 9 6

J a n - 9 7

J a n - 9 8

J a n - 9 9

J a n - 0 0

J a n - 0 1

J a n - 0 2

J a n - 0 3

J a n - 0 4

J a n - 0 5

J a n - 0 6

J a n - 0 7

J a n - 0 8

J a n - 0 9

J a n - 1 0

J a n - 1 1

Oct '93 - Jun '02 7.60%

Jun '02 - Dec '08 6.07%

Since Dec '08

4.79

Average Mortgage Interest Rate30-year Fixed-Rate Loans




Elevated unemployment remains asubstantial drag on housing demand.

Source: Virginia Employment Commission

Unemployment Rate

0.0

2.0

4.0

6.0

8.0

O c t - 0 5

F e b -

0 6

J u n - 0 6

O c t - 0 6

F e b -

0 7

J u n - 0 7

O c t - 0 7

F e b -

0 8

J u n - 0 8

O c t - 0 8

F e b -

0 9

J u n - 0 9

O c t - 0 9

F e b -

1 0

J u n - 1 0

O c t - 1 0

F e b -

1 1

J u n - 1 1

Virginia

Charlottsville Metro Area

May '07

2.1

Aug '11

5.5

Jan '10

6.6




Real personal income has fallen, andlikely remains below pre-recession levels.

Sources: U.S. Bureau of Economic Analysis (per capital personal income) andU.S. Bureau of Labor Statistics (CPI)

Annual Change in Charlottesville Metro Area

Inflation-adjusted Per Capita Personal Income

3.7%

0.7%

-1.3%

1.4%

3.9%

2.3%

5.2%

2.8%

-1.6% -1.7%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009




Homeowners with negative equity remain asubstantial barrier to existing home sales.

Sources: CoreLogic, a real estate data and analytics company

Estimated Share of Virginia Home

Mortgages with Negative Equity

24.3% 23.6% 22.7% 22.1% 23.4% 23.1% 23.3%

2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2




Student loan debt is unsustainably high,and is a barrier to first-time home purchase.

• Student debt can carryinterest rates as high assubprime mortgages, and ishard to shed even throughbankruptcy.

• The Collegiate EmploymentResearch Institute estimatesthat in 2011, the averagesalary for new bachelordegree holders is $36,866,down 21% from $46,500 in2009.

• The Charlottesville market isespecially vulnerable in lightof its dependence on highereducation and its largenumber of recent graduates.

Sources: National Center for Education Statisticsand Mark Kantrowitz of Fastweb.com and FinAid.org

Average student loan debt,

adjusted for inflation, is up 8%from 2010, and has risen more

than 47% over the past decade.

$22,900

Avg. Debt =

The Class of 2011

is the most indebted ever.




2. Mortgage Market Issues

Resolution of foreclosuresand distressed inventory




Source: RealtyTrac and Census Bureau

The Good News: Charlottesville’s foreclosure rate remains relatively low compared to Virginia’s rate

and especially to the rate in the outerpart of the Northern Tier Region.

Northern Tier

Inner

Outer

Trustee Sales and Lender RepossessionsAugust 2011

0.00% 0.10% 0.20% 0.30% 0.40% 0.50%

Southern Tier

Roanoke-Blacksburg-Lynchburg

Charlottesville-Central Valley

Northern Tier -- Inner (PD 8)

VIRGINIA

Hampton Rds-Chesapeake Bay

Greater Richmond

Northern Tier -- Outer

Share of Homes with a Mortgage

VIRGINIA

Charlottesville-Central Valley




Charlottesville’s inventory of distressed

properties is relatively low and falling.

Source: RealtyTrac and Census Bureau

Inventory of Lender-owned Homes

0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Staunton-Waynesboro

Micropolitan Area

Charlottesville MSA

Richmond MSA

Virginia

Washington-Arlington-

Alexandria MSA (VA part)

Culpeper County

Share of Homes with a Mortgage

Sep 2010

Sep 2011Charlottesville MSA

VIRGINIA




The Bad News: Mortgage lending is drivenby macro conditions well beyond Charlottesville.

• Nationally, and in Virginia at large, the foreclosureproblem is far from over.

• Lender resources are focused mainly on managingsubstantial and growing portfolio losses and

resolving the extremely large ―shadow‖ inventory of distressed properties.

• Federal policy and regulatory oversight of FannieMae, Freddie Mac and the FHA have been heavily

focused on ―back-ward looking attempts to addressthe consequences of past errors‖* rather than

helping to stabilize the nation’s housing market. (*Lawrence Summers, Wall Street Journal, October 23, 2011)




During the boom, household mortgage debtsky-rocketed, and is still at an historic high.

Sources: Federal Reserve Flow of Funds Account Report (mortgage debt) andBureau of Economic Analysis (GDP)

Ratio of U.S. Household Mortgage Debt

to Gross Domestic Product (GDP)

20%

30%

40%

50%

60%

70%

80%

1 9 8 0

1 9 8 5

1 9 9 0

1 9 9 5

2 0 0 0

2 0 0 5

2 0 1 0

Housing

Boom

48%

74%




High debt was enabled by rising prices.Now, falling prices put many ―underwater.‖

Sources: Federal Reserve Flow of Funds Account Report (household debt), Bureau of Economic Analysis(GDP), Federal Housing Finance Agency (price index), and Bureau of Labor Statistics (CPI)

20%

30%

40%

50%

60%

70%

80%

1 9 7 5

1 9 8 0

1 9 8 5

1 9 9 0

1 9 9 5

2 0 0 0

2 0 0 5

2 0 1 0

75

100

125

150

Ratio of U.S. Household

Mortgage Debt to GDP

FFHA Inflation-Adjusted

U.S. Housing Price Index

(1980 = 100)

Rise in

"underwater"

borrowers




High debt levels became unsustainableonce home prices fell following the boom.

Sources: Federal Reserve Flow of Funds Account Report (household debt), Bureau of Economic Analysis(GDP), Federal Housing Finance Agency (price index), and Bureau of Labor Statistics (CPI)

20%

30%

40%

50%

60%

70%

80%

1 9 8 0

1 9 8 5

1 9 9 0

1 9 9 5

2 0 0 0

2 0 0 5

2 0 1 0

0%

1%

2%

3%

4%

5%

6%

Ratio of U.S. HouseholdMortgage Debt to GDP

U.S. Serious

Delinquency Rate

Housing

Boom




High levels of mortgage debt must bereduced in order to revive the market.

Nonetheless, there is no near-term resolution tothe substantial inventory of distressed loans.

– There is no consensus on how to allocatethe cost of considerable unrealized lossesbetween borrowers, investors and taxpayers.

– Any federal action to force principal write

downs would carry significant legal propertyrights implications.




The Administration is attempting to helpthose who are current, but ―underwater.

• The Administration is again reforming the HomeAffordable Refinance Program (HARP) in order tomake it more workable for owners seeking toreduce their mortgage costs.

• The newly announced revisions expand eligibilityand reduce numerous disincentives for lenderparticipation.

• If it is successful, then the plan will:

– Stimulate consumer spending – Enable faster pay down of existing mortgages – Support economic growth which will benefit the housing

market




In the short term, promotion of refinancemay undercut new loan originations.

• The plan will not stimulate home sales. – It will not reduce the number of ―under water‖ homeowners.

– New mortgage originations could actually suffer if lendersbecome overwhelmed by refinance demand.

• Federal support of low GSE interest costscontinues to have a significant downside.

– It impedes the revival of the private mortgage-backed

securities market thereby perpetuating federal dependency. – It undercuts the ability of state housing finance agencies to

fund first-time homebuyer programs, which are now themain source of needed down payment assistance.




2. Mortgage Market Issues

Management of NewLending Risks




Regulatory policy is overemphasizing theimportance of LTVs relative to other risks.

• During the boom, it was the layering of risk: – substantial loosening of debt ratios – undocumented income – use of ―teaser‖ qualifying rates – loose HELOC lending

that led to skyrocketing defaults once falling pricesmade it infeasible to refinance unaffordable debt.

• Nevertheless, federal regulatory and program

reforms continue to prioritize reducing allowableloan-to-value (LTV) ratios, despite the inability ofcurrent purchasers—especially first-time buyers—toafford a sizable down payment.




Historic experience with higher LTVlending shows the risks are manageable.

• Following the Great Depression, the federal FHAand VA loan programs enabled a whole generationof young households to become successfulhomeowners with only a limited down payment.

• Today, state housing finance agencies continue tosuccessfully manage high LTV lending programswith loan performance records that regularly exceedthose of the conventional mortgage industry.

• Nonetheless, the continued ability of state housingfinance agencies to address first-time homebuyerneeds is jeopardized by unintended consequencesof broader federal policy.




3. Addressing Obstacles




Leveling the Playing Field

• Current federal interest rate and regulatory policy is

creating an unlevel playing field and is contributing toincreased concentration of mortgage lending amongthe largest national lenders.

• Interest rate policy is making it extremely difficult for

portfolio lenders such as state housing financeagencies to actively contribute to market recovery.

• These are lenders that, by and large, did notparticipate in the poor lending practices that

characterized the peak of the housing boom.

• They know their markets and are able to prudentlyand effectively bring first-time buyers into the market.




Rebuilding Confidence

• The market is at its nadir and pessimism reins. In this

environment, industry partners must work together tore-instill the confidence of buyers.

• A new analysis of data from the Michigan Survey ofConsumers by the Federal Reserve Bank of Boston,

finds that younger households are showing especiallylow levels of confidence about homeownership.

• Continuing industry support for homebuyer educationprograms and K-12 financial literacy classes are criticalto building healthy demand among young buyers.

• Likewise, resolving the student loan crisis is a neededlong-term step to ensure the confidence and ability ofyoung households to take on mortgage debt.




Helping First-time Buyers

VHDA’s is supporting Charlotteville’s housing market by:

– Continuation of high LTV lending Our “FHA Plus” program provides an FHA-insured 1st mortgagewith a VHDA piggy-back 2nd mortgage for down payment andclosing cost assistance. Both loans have 30-year terms and thecarry the same interest rate.

– New increased eligibility limits to serve widening need

Sales price: $325,000Income: $87,400 (1-2 people) / $101,200 (3 or more people)

– Requiring homebuyer education of all borrowers

VHDA supports statewide access to free homebuyer education—

including on-line classes—for any interested participant.

– Providing in-house servicing for all loans

VHDA is committed to sustaining long-term homeownershipthrough pro-active loss mitigation practices.



30

Summary of Key Points

1. The worst of the housing decline is behind us.Nevertheless:• The market is still struggling to find a firm bottom.

• A significant recovery is not imminent.

2. The obstacles to recovery are considerable.• They reflect a lack of political consensus on

fundamental issues.

• Many are beyond the scope of direct industryinfluence.

3. The Charlottesville area faces challenges.• There are barriers to bringing first-time buyers back

into the market.

• VHDA is taking actions to bolster the market andsupport a sustainable recovery.

barry merchant's presentation to caar - 10-26-2011

Documents