Foreclosures in Virginia: The Outlook for 2010 and Beyond Virginia Foreclosure Prevention Task Force November 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 will be a significant problem through mid 2012

4 The sub-prime wave is past, but other loan types are now at risk Source: Credit Suisse, IMF Global Financial Stability Report, September 2007 Nov mid 2012

5 “Option ARM” loans are now 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 concentrated in Northern VA and Hampton Roads Source: 1 st American CoreLogic and Census Bureau

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

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

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

12 Nonetheless, prices will not stabilize until rising sales have time to work off the large inventory of unsold homes and foreclosures Source: MRIS

13 The large foreclosed “shadow” inventory puts a lid on price recovery in Northern VA Source: RealtyTrac and MRIS

14 It would take five years to eliminate the Northern Tier Region’s foreclosed inventory at the 2009 drawdown pace Source: RealtyTrac

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

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 factors for 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 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 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.