Foreclosures in Virginia:The Outlook for 2010

and Beyond

Virginia Foreclosure Prevention Task ForceNovember 18, 2009

2

There are three factors sustaining foreclosures that must be mitigated

before the crisis can abate

1. The ongoing wave of initial resets of payment terms on non-traditional loans

2. Loss of borrower income due to unemployment and under employment

3. Depressed home values that leave distressed borrowers “under water” with their mortgage

1. Initial loan resets willbe a significant problem through mid 2012

4

The sub-prime wave is past, butother loan types are now at risk

Source: Credit Suisse, IMF Global Financial Stability Report, September 2007

Nov. 2009

mid 2012

5

“Option ARM” loans arenow the greatest concern

• “Option ARMs”—a class of “Alt-A loans”—carried low initial interest rates and also allowed for negative amortization.

• Option ARMs were used by borrowers with good credit in high-cost markets to purchase homes they would have difficulty qualifying for with traditional, fully amortizing loans.

• Many borrowers expected to build equity quickly and refinance to other loans before the initial reset.

• Defaults are triggered by falling home prices that preclude the feasibility of refinancing.

6

“Alt-A” loans are most concentratedin Northern VA and Hampton Roads

Alt-A Share of Mortgages

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%

Bluefield Micropolitan Area (VA pt.)

Kingsport-Bristol MSA (VA pt.)

Martinsville Micropolitan Area

Blacksburg-Christiansburg-Radford MSA

Danville MSA

Non-metropolitan areas

Harrisonburg MSA

Roanoke MSA

Lynchburg MSA

Staunton-Waynesboro Micropolitan Area

Richmond MSA

Charlottesville MSA

VIRGINIA

VA Beach-Norfolk-Newport News MSA (VA pt.)

Winchester MSA (VA pt.)

Washington-Arlington-Alexandria MSA (VA pt.)

Culpeper Micropolitan Area

Source: 1st American CoreLogic and Census Bureau

2. Unemployment willlikely exert upward pressure on defaults through mid-2011

8

A rise in serious delinquencies lags an increase in unemployment by over a year

Experience of Last Major Recession in Early 1990's

0.75%

1.00%

1.25%

1.50%

1.75%

1990

-1

1990

-2

1990

-3

1990

-4

1991

-1

1991

-2

1991

-3

1991

-4

1992

-1

1992

-2

1992

-3

1992

-4

1993

-1

1993

-2

1993

-3

1993

-4

1994

-1

1994

-2

1994

-3

1994

-4

Calendar Year Quarter

Se

rio

us

De

linq

ue

nc

y R

ate

(4-q

uar

ter

roll

ing

ave

rag

e)

3.0%

4.0%

5.0%

6.0%

7.0%

Un

em

plo

ym

en

t Ra

te(4-q

uarter ro

lling

average)

Serious Delinquencies

Unemployment

15 months

Peak in3rd Quarter 1992

Peak in4th Quarter 1993

Source: Virginia Employment Commission (VEC) and Mortgage Bankers Association (MBA)

9

Renewed job growth is expected to substantially lag the upturn in GDP—thus, unemployment could rise well into 2010

Source: Virginia Employment Commission (VEC)

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%

Washington, DC (VA pt)

Charlottesville

Harrisonburg

Hampton Roads (VA pt)

Lynchburg

Roanoke

Winchester (VA pt)

Richmond

Blacksburg

Kingsport-Bristol (VA pt)

Danville

Sep 2009 Sep 2008

Unemployment Rates for Virginia's Metropolitan Areas

3. Statewide, home prices will not fully stabilize before mid 2010, and there remains risk of a double dip

11

Home sale declines have now bottomed out in all parts of the state—this is the first step

in price stabilization and recovery

Source: VAR

Existing Home Sales Index

0

25

50

75

100

125

150

Calendar Year Quarter

Ind

ex

(0

3-1

= 1

00

)

Northern Tier Greater Hampton Rds Greater Richmond Balance of State

Northern Tier Peak = 2nd Qtr 2005 Other Markets Peak = 2nd Qtr 2006

12 mos.

15 mos.

Other Markets Trough = 2nd Qtr 2009

Northern Tier Trough = 1st Qtr 2008

12

Nonetheless, prices will not stabilize until rising sales have time to work off the large

inventory of unsold homes and foreclosures

Source: MRIS

Example: Prince William Market Area

$0

$100,000

$200,000

$300,000

$400,000

$500,000

Me

dia

n E

xis

tin

g H

om

e P

ric

e

0

300

600

900

1,200

1,500

Ex

istin

g H

om

e S

ale

s(12-m

on

th ro

lling

average)

25 months

Home Sales

Home Prices

14 months

13

The large foreclosed “shadow” inventoryputs a lid on price recovery in Northern VA

Source: RealtyTrac and MRIS

Ratio of Lender-Owned Homes toTotal Existing Home Sale Listings

Northern T ier Region (PDs 7, 8, 9 & 16)

0%

20%

40%

60%

80%

100%

14

It would take five years to eliminate the Northern Tier Region’s foreclosed inventory

at the 2009 drawdown pace

Source: RealtyTrac

Inventory of Foreclosed HomesNorthern T ier Region

0

5,000

10,000

15,000

20,000Jan '0914,171

Nov '0912,191

Average monthly decline in 2009 =

200 homes

15

In addition, there is another significant“shadow” inventory in Northern VA

• Many traditional sellers continue to hold homes off the market, waiting for values to recover.

• New listings have fallen steeply, and are now at a level last seen in April 2001 before the boom.

Source: MRIS

Northern VA MLS AreaFairfax, Arlington & Alexandria

2,000

2,500

3,000

3,500

4,000

4,500

New MLS Listings

Apr '012,441

Oct '092,442

16

The federal homebuyer tax credit has helped to stabilize local markets, but has

not yet given them a significant lift

• Northern Tier Region: The credit appears to have stopped the recent slowdown in sales, but has not lifted the overall market. The recent up-tick in some area median home prices may also be due to the credit.

• Downstate: The credit may have helped sales stabilize, but no significant upturn is yet apparent.

• Extension of the credit will help sales levels and prices remain stable during the slow winter months.

• However, expiration of the credit in spring 2010 could result in a second dip in sales that would weaken prices.

17

Following are the risk factorsfor a double dip in prices:

• The substantial “shadow” inventory in the Northern Tier Region of both foreclosed homes and traditional listings.

• The end of the tax credit stimulus to home sales in spring 2010.

• The anticipated gradual rise in mortgage interest rates in 2010 as the Federal Reserve phases out purchases of GSE mortgage securities.

What are the implications of these trends for Virginia?

19

Virginia will continue to face a serious foreclosure problem for several years

• Foreclosure rates may peak in 2010, but will likely remain high through 2012.

• The large inventory of foreclosed homes will continue to destabilize impacted neighborhoods for a protracted period.

• The “shadow” inventory of unsold homes will retard a recovery in home prices, and will continue to stress local tax bases.

• The transition of the housing market off government stimulus support will be difficult, and will pose risks of a second dip in home sales and prices.