Virginia Housing Development Authority Review of Virginia Foreclosure Trends September 21, 2010

1 vhda.com | VHDA Depressed prices and unemployment are keeping loan defaults rates high. The foreclosure crisis began with unprecedented defaults on weakly underwritten sub-prime and low documentation “alt-A” loans. That problem is waning. Nonetheless, large inventories of foreclosed homes continue to depress home values, and are keeping a large share of mortgages “under water.” Now, it is unemployment and loss of income that is mainly driving homeowners into default—especially those who are “underwater” and cannot sell. The impact of high unemployment on default rates appears to be peaking, but renewed economic weakness and a slow jobs recovery will likely retard the pace at which the foreclosure rate declines.

2 vhda.com | VHDA Subprime foreclosures are declining as prime foreclosures begin to peak. Source: Mortgage Bankers Association (MBA)

3 vhda.com | VHDA Subprime and Alt-A loans no longer dominate foreclosure activity. Source: Mortgage Bankers Association (MBA)

4 vhda.com | VHDA Now that the second wave is cresting, total loans in foreclosure should fall. Source: Mortgage Bankers Association (MBA)

5 vhda.com | VHDA In the 2 nd Qtr. of 2010, the serious delinquency rate continued to drop. Source: Mortgage Bankers Association (MBA)

6 vhda.com | VHDA Likewise, early delinquency rates have shown recent small declines. Source: Mortgage Bankers Association (MBA)

7 vhda.com | VHDA In the past, the peak in defaults has trailed the peak in unemployment. Source: Virginia Employment Commission and Mortgage Bankers Association (MBA)

8 vhda.com | VHDA This time, defaults have been a leading rather than a lagging indicator. Source: Virginia Employment Commission and Mortgage Bankers Association (MBA)

9 vhda.com | VHDA Despite positive signs, it is likely the foreclosure problem is far from over. Several major headwinds are likely to retard any near-term steady drop in foreclosure activity: –Slowing economic growth will likely extend the already weak jobs recovery –Renewed declines in home sales and large inventories of distressed properties will restrain any further rebound in home prices, keeping large numbers of homeowners “under water”

10 vhda.com | VHDA Fixed rate loan foreclosures are unlikely to decline steadily until Source: Mortgage Bankers Association (MBA)

11 vhda.com | VHDA The market will be adversely impacted through at least Source: Mortgage Bankers Association (MBA)

12 vhda.com | VHDA …but, the impact of distressed inventory could extend well beyond Source: Mortgage Bankers Association (MBA)

13 vhda.com | VHDA In mid 2008, foreclosure activity was heavily concentrated in the Northern Tier Region. Source: RealtyTrac and Census Bureau Northern Tier Downstate Regions As economic factors have increased in importance, downstate foreclosures have risen steadily. In contrast, foreclosure activity is declining in the Northern Tier where unemployment is lower. The regional distribution of foreclosures is shifting. *Trustee sales and lender repossessions

14 vhda.com | VHDA High and rising foreclosure rates are related to two combined problems: 1.High unemployment 2.A large inventory of distressed properties and/or a large share of homeowners who are “underwater” Areas with foreclosure rates above the state average exhibit both problems. Where unemployment is lower—e.g., inner parts of the Northern Tier, including Pr. William Co.— foreclosures rates are stable or declining even where distressed inventories remain high. Likewise, where unemployment is very high— e.g., the Martinsville area—but where few homeowners are “underwater”, foreclosure rates are lower.

15 vhda.com | VHDA Unemployment and falling prices are having differing regional impacts. Source: FHFA Home Price Index and Virginia Employment Commission (VEC)

16 vhda.com | VHDA Source: RealtyTrac and Census Bureau *Trustee sales and lender repossessions Foreclosure rates are most severe in the outer part of the Northern Tier. Northern Tier Inner Outer

17 vhda.com | VHDA The stock of lender-owned homes is large and will take time to deplete. Source: RealtyTrac

18 vhda.com | VHDA Sales to investors remain high in the Northern Tier Region. Source: MRIS

19 vhda.com | VHDA Investors are playing a critical role, but they cannot sustain a full recovery. Investors will play a key role for several more years until the distressed inventory is resolved. However, investor appetite will wane as prices rise—therefore, home appreciation will be constrained until sales to owner-occupants increase. Now that the federal tax credit has ended, a new demand driver is needed.

20 vhda.com | VHDA The tax credit did not give a lasting lift. Now there is risk of a “double dip.” Source: MRIS

21 vhda.com | VHDA Statewide, despite the tax credit, home sales have remained flat. Source: VAR

22 vhda.com | VHDA In Summary: Market conditions will remain challenging for the next several years until the foreclosure problem is resolved and economic recovery takes fuller hold. Continued high levels of distressed sales coupled with weakened demand among traditional buyers will restrain prices and could result in a “double dip” in prices in some markets. Long-term home appreciation will depend on employment and income growth.