Virginia Housing Development Authority Housing Market Update Charlottesville Area Association of Realtors October 26, 2011

1 vhda.com | 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

2 vhda.com | VHDA 1.Housing Market Overview Where We Are

3 vhda.com | VHDA Existing home sales in Virginia appear to be re-stabilizing at a 13-year low. Source: Virginia Association of Realtors (VAR)

4 vhda.com | VHDA Both the Northern Tier and Downstate markets are searching for a new bottom. Source: Virginia Association of Realtors (VAR)

5 vhda.com | VHDA Home sales trends in Charlottesville are closely tracking other downstate regions. Source: Virginia Association of Realtors (VAR)

6 vhda.com | VHDA Area home prices are tracking statewide changes, and have not yet found a bottom. Source: Federal Housing Finance Agency (FHFA)

7 vhda.com | VHDA 1.Housing Market Overview Constraints on Demand

8 vhda.com | VHDA The Fed’s efforts to keep mortgage rates at historic lows have not revived the market. Source: Federal Housing Finance Agency (FHFA)

9 vhda.com | VHDA Elevated unemployment remains a substantial drag on housing demand. Source: Virginia Employment Commission

10 vhda.com | VHDA Real personal income has fallen, and likely remains below pre-recession levels. Sources: U.S. Bureau of Economic Analysis (per capital personal income) and U.S. Bureau of Labor Statistics (CPI)

11 vhda.com | VHDA Homeowners with negative equity remain a substantial barrier to existing home sales. Sources: CoreLogic, a real estate data and analytics company

12 vhda.com | VHDA Student loan debt is unsustainably high, and is a barrier to first-time home purchase. Student debt can carry interest rates as high as subprime mortgages, and is hard to shed even through bankruptcy. The Collegiate Employment Research Institute estimates that in 2011, the average salary for new bachelor degree holders is $36,866, down 21% from $46,500 in The Charlottesville market is especially vulnerable in light of its dependence on higher education and its large number of recent graduates. Sources: National Center for Education Statistics and Mark Kantrowitz of Fastweb.com and FinAid.org The Class of 2011 is the most indebted ever.

13 vhda.com | VHDA 2.Mortgage Market Issues Resolution of foreclosures and distressed inventory

14 vhda.com | VHDA 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 outer part of the Northern Tier Region. Northern Tier Inner Outer

15 vhda.com | VHDA Charlottesville’s inventory of distressed properties is relatively low and falling. Source: RealtyTrac and Census Bureau

16 vhda.com | VHDA The Bad News: Mortgage lending is driven by macro conditions well beyond Charlottesville. Nationally, and in Virginia at large, the foreclosure problem is far from over. Lender resources are focused mainly on managing substantial and growing portfolio losses and resolving the extremely large “shadow” inventory of distressed properties. Federal policy and regulatory oversight of Fannie Mae, Freddie Mac and the FHA have been heavily focused on “back-ward looking attempts to address the consequences of past errors”* rather than helping to stabilize the nation’s housing market. (*Lawrence Summers, Wall Street Journal, October 23, 2011)

17 vhda.com | VHDA During the boom, household mortgage debt sky-rocketed, and is still at an historic high. Sources: Federal Reserve Flow of Funds Account Report (mortgage debt) and Bureau of Economic Analysis (GDP)

18 vhda.com | VHDA 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)

19 vhda.com | VHDA High debt levels became unsustainable once 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 vhda.com | VHDA High levels of mortgage debt must be reduced in order to revive the market. Nonetheless, there is no near-term resolution to the substantial inventory of distressed loans. –There is no consensus on how to allocate the cost of considerable unrealized losses between borrowers, investors and taxpayers. –Any federal action to force principal write downs would carry significant legal property rights implications.

21 vhda.com | VHDA The Administration is attempting to help those who are current, but “underwater. The Administration is again reforming the Home Affordable Refinance Program (HARP) in order to make it more workable for owners seeking to reduce their mortgage costs. The newly announced revisions expand eligibility and reduce numerous disincentives for lender participation. 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

22 vhda.com | VHDA In the short term, promotion of refinance may 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 lenders become overwhelmed by refinance demand. Federal support of low GSE interest costs continues 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 the main source of needed down payment assistance.

23 vhda.com | VHDA 2.Mortgage Market Issues Management of New Lending Risks

24 vhda.com | VHDA Regulatory policy is overemphasizing the importance 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 prices made it infeasible to refinance unaffordable debt. Nevertheless, federal regulatory and program reforms continue to prioritize reducing allowable loan-to-value (LTV) ratios, despite the inability of current purchasers—especially first-time buyers—to afford a sizable down payment.

25 vhda.com | VHDA Historic experience with higher LTV lending shows the risks are manageable. Following the Great Depression, the federal FHA and VA loan programs enabled a whole generation of young households to become successful homeowners with only a limited down payment. Today, state housing finance agencies continue to successfully manage high LTV lending programs with loan performance records that regularly exceed those of the conventional mortgage industry. Nonetheless, the continued ability of state housing finance agencies to address first-time homebuyer needs is jeopardized by unintended consequences of broader federal policy.

26 vhda.com | VHDA 3.Addressing Obstacles

27 vhda.com | VHDA Leveling the Playing Field Current federal interest rate and regulatory policy is creating an unlevel playing field and is contributing to increased concentration of mortgage lending among the largest national lenders. Interest rate policy is making it extremely difficult for portfolio lenders such as state housing finance agencies to actively contribute to market recovery. These are lenders that, by and large, did not participate in the poor lending practices that characterized the peak of the housing boom. They know their markets and are able to prudently and effectively bring first-time buyers into the market.

28 vhda.com | VHDA Rebuilding Confidence The market is at its nadir and pessimism reins. In this environment, industry partners must work together to re-instill the confidence of buyers. A new analysis of data from the Michigan Survey of Consumers by the Federal Reserve Bank of Boston, finds that younger households are showing especially low levels of confidence about homeownership. Continuing industry support for homebuyer education programs and K-12 financial literacy classes are critical to building healthy demand among young buyers. Likewise, resolving the student loan crisis is a needed long-term step to ensure the confidence and ability of young households to take on mortgage debt.

29 vhda.com | VHDA 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 1 st mortgage with a VHDA piggy-back 2 nd mortgage for down payment and closing cost assistance. Both loans have 30-year terms and the carry the same interest rate. –New increased eligibility limits to serve widening need Sales price: $325,000 Income: $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 homeownership through pro-active loss mitigation practices.

30 vhda.com | VHDA 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 industry influence. 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 and support a sustainable recovery.