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Review of Virginia Foreclosure Trends and Market Conditions

Review of Virginia Foreclosure Trends and Market Conditions. July 20, 2010. Current Foreclosure Situation and Trends. The foreclosure crisis began with unprecedented defaults on weakly underwritten sub-prime and low documentation “alt-A” loans. That problem is waning.

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Review of Virginia Foreclosure Trends and Market Conditions

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  1. Review of VirginiaForeclosure Trends and Market Conditions July 20, 2010

  2. Current ForeclosureSituation and Trends

  3. 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 on high unemployment on default rates will not peak until late 2010 or early 2011, and then abate slowly as people regain jobs. Depressed prices and unemployment are keeping loan defaults rates high.

  4. Subprime foreclosures are declining as prime loan foreclosures rise. Source: Mortgage Bankers Association (MBA)

  5. Subprime and Alt-A loans no longer dominate foreclosure activity. Source: Mortgage Bankers Association (MBA)

  6. The lull between the two waves has caused foreclosures to plateau. Source: Mortgage Bankers Association (MBA)

  7. In the 1st Qtr. of 2010, the serious delinquency rate had a slight dip. Source: Mortgage Bankers Association (MBA)

  8. Likewise, early delinquency rates have shown small recent declines. Source: Mortgage Bankers Association (MBA)

  9. Nonetheless, the peak of the second wave will not likely come until 2011. Source: Virginia Employment Commission and Mortgage Bankers Association (MBA)

  10. In this recession, problem loans made defaults a leading rather than a lagging indicator, thereby extending the pain. Source: Virginia Employment Commission and Mortgage Bankers Association (MBA)

  11. The foreclosure problemis likely far from over. Source: Mortgage Bankers Association (MBA)

  12. The market will be adversely impacted through at least 2012 ... Source: Mortgage Bankers Association (MBA)

  13. …but, the impact of distressed inventory could extend well beyond 2012. Source: Mortgage Bankers Association (MBA)

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

  15. High and rising foreclosure rates are related to two combined problems: • High unemployment • 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., Martinsville—but where few homeowners are “underwater”, foreclosure rates remain low.

  16. Unemployment and falling prices are having differing regional impacts. Source: FHFA Home Price Index and Virginia Employment Commission (VEC)

  17. Foreclosure rates are mostsevere in the outer partof the Northern Tier. Northern Tier Inner Outer *Trustee sales and lender repossessions Source: RealtyTrac and Census Bureau

  18. Factors ImpactingMarket Recovery

  19. The “shadow” inventory continues to put a substantial drag on market recovery: Inventories of foreclosed and distressed properties remain high. For-sale inventories are returning to normal levels. However, a large share of inventory reduction has been due to would-be for-sale properties being held off the market by sellers waiting for improved prices. Supply Factors:

  20. The stock of lender-owned homes remains high and is rising downstate. Source: RealtyTrac

  21. Unsold existing home inventories are again balanced in the Northern Tier… Source: MRIS

  22. …but, falling listings have contributed more to the reduction than rising sales. Source: RealtyTrac

  23. By traditional measures, the cost of home purchase has dropped. However … Access to favorable mortgage terms and underwriting standards remains a challenge. Consumer purchasing power and confidence remain weak. Demand Factors:

  24. Mortgage rates remain in a narrow band at historically low levels. Source: Federal Housing Finance Agency (FHFA)

  25. The fear that mortgage rates would jump once the Fed stopped direct purchases of GSE securities on March 31, has been unfounded. 10-year Treasury rates, to which mortgages are pegged, are at new lows due to the “flight to safety” in the wake of the European debt crisis and concern about a “double dip” recession. Furthermore, the Fed appears unwilling to significantly reduce its holdings of mortgage-backed securities (MBS) anytime soon. Total Fed MBS holding now exceed $1.1 trillion. Mortgage rates will likelyremain low well into 2011.

  26. MBS now represent over half the Fed’s direct securities holdings. Source: Federal Reserve Board

  27. By traditional measures, homes in most markets are again affordable. Source: MRIS, VAR and Census Bureau

  28. Young households are especially impacted by unemployment and under-employment—this has off-set the stimulus impact of the federal home purchase tax credit. Access to mortgage credit remains a barrier due to ongoing tightening of lending standards. In some areas 1st-time buyers have had trouble competing against investors with cash. Would-be “trade-up” buyers are holding back due to significant loss of equity. Nonetheless, traditional buyers arestill struggling to enter the market.

  29. Higher minimum loan-to-value ratios have significantly increased down payment requirements. Young households lack the savings needed to cover down payment and closing costs. Parents are less able to assist with these costs due to loss of income, home equity and the value of stock holdings. Funds for down payment is agrowing barrier for first-time buyers.

  30. Burdensome debt is another major obstacle for young households. • Young households are carrying far higher debt loads than in the past. • Both credit card and student loan debt are problems. • Acquiring financial management skills and paying down debt are essential for successful home purchase. Source: Survey of Consumer Finance

  31. VHDA is continuing to fund down payment assistance through its “FHA Plus” program. VHDA requires all of its borrowers to participate in free homeownership education—either through face-to-face classes or on-line courses. Homeownership education classes are offered statewide and in a variety of languages. Nonetheless, the ongoing tightening of mortgage underwriting standards across the industry is restricting the pool of qualifying first-time buyers. Down payment assistance and financial education are available.

  32. Sales to investors remain highin the Northern Tier Region. Source: MRIS

  33. Investors will play a key role for several more years until the distressed inventory is resolved. However, investor appetite will wane as price rise—therefore, home appreciation will be constrained until sales to owner-occupants increase. The industry must work together to motivate qualified potential buyers in the face of uncertain employment and stagnant home values. Investors are playing a critical role,but they cannot sustain a full recovery.

  34. As the federal tax credit winds down, a new demand driver is needed. Source: MRIS

  35. The Tax Credit did not give a lasting lift. Now there is risk of a “double dip.” Source: VAR

  36. What is the near-termmarket outlook?

  37. A large share of sales were pushed forward to meet the federal homebuyer tax credit deadline. Mortgage reservations were down substantially in May and June—VHDA’s reservations fell 50% between April and May on a seasonally adjusted basis, and have remained at that reduced level. While the first-time homebuyer sector served by VHDA was the most impacted by the end of the credit, the Mortgage Bankers Association reports a 30+% drop in overall new purchase mortgage applications since the end of the credit. Home sales have fallen sharply sincethe end of the tax credit program.

  38. 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. In Summary:

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