Overview of Virginia�s Foreclosure Problem

Overview of Virginia’s Foreclosure Problem August 2008 What is the size and extent of Virginia’s foreclosure problem? Virginia’s foreclosure rate is nearly half the U.S. rate, but has risen rapidly Foreclosure Rate at End of Quarter 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 19 89 19 4 90 19 4 91 19 4 92 19 4 93 19 4 94 19 4 95 19 4 96 19 4 97 19 4 98 19 4 99 20 4 00 20 4 01 20 4 02 20 4 03 20 4 04 20 4 05 20 4 06 20 4 07 -4 U.S. Virginia Calendar Year Quarter Source: Mortgage Bankers Association (MBA) Northern Virginia’s problem is worse than elsewhere in the state Estimated Foreclosure Rates as of March 31, 2008 U.S. Culpeper MSA Winchester MSA (VA part) Washington-Arlington-Alexandria MSA (VA part) VIRGINIA VA Beach-Norfolk-Newport News MSA (VA part) Richmond MSA Martinsville MSA Roanoke MSA Non-metropolitan areas Lynchburg MSA Danville MSA Staunton-Waynesboro MSA Charlottesville MSA Harrisonburg MSA Kingsport-Bristol MSA (VA part) Blacksburg-Christiansburg-Radford MSA Bluefield MSA (VA part) 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Area estimates are based on data from the MBA and First American LoanPerformance But, there is significant variance in rates among localities within NoVA Estimated Foreclosure Rates as of March 31, 2008 Prince William, Manassas, & Manassas Park U.S. Culpeper MSA Winchester MSA (VA part) Stafford, Spotsylvania, & Fredericksburg Washington-Arlington-Alexandria MSA (VA part) Loudoun County Fauquier, Clarke, & Warren Fairfax City & Co. VIRGINIA Arlington, Alexandria, Falls Church 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Local estimates are based on data from the MBA, RealtyTrac.com and First American LoanPerformance Foreclosure “hot spots” in NoVA have large, growing minority populations RANK AMONG TOP 25 JURISDICTIONS NATIONALLY IN RATE OF MINORITY POPULATION GROWTH 3 Manassas Park City +18.1% 50.3 10 Pr. William County +12.9% 11 Manassas City +12.6% 13 Loudoun County +12.1% 23 Stafford County +9.2% 47.7 34.8 33.2 45.8 44.9 32.2 28.9 20.0 19.7 Minority percentage of total population 2000 2006 Hampton Roads’ problem is highly focused in Norfolk and VA Beach Estimated Foreclosure Rates as of March 31, 2008 Norfolk City U.S. Virginia Beach City VIRGINIA VA Beach-Norfolk-Newport News MSA (VA part) Portsmouth City Suffolk, Isle of Wight, & Surry Hampton City Chesapeake City Newport News City Wmsbg., Jms. Cty., York, Poq., Glouc., & Math. 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Local estimates are based on data from the MBA, RealtyTrac.com and First American LoanPerformance Richmond’s problem is focused in the city and adjacent county areas Estimated Foreclosure Rates as of March 31, 2008 Note: Caroline Co., while included in the Richmond MSA, is becoming a commuter suburb of NoVA and its foreclosure problems fit the NoVA pattern rather than the pattern found in the rest of the Richmond MSA. Caroline County U.S. Richmond City VIRGINIA Henrico County Chesterfield County Richmond MSA Hanover County Petersburg, Hopewell, Colonial Heights New Kent, Charles City, King William, & King and Queen Prince George, Dinwiddie, & Sussex Cumberland, Amelia, Powhatan, Goochland & Louisa 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Local estimates are based on data from the MBA, RealtyTrac.com and First American LoanPerformance What is driving Virginia’s foreclosure problem? Today’s foreclosure problem is being driven by a new set of factors • In the past, rising foreclosures mainly resulted from changes in household economic condition—e.g., job loss, separation/divorce, unforeseen medical bills. Today, there are three new interrelated drivers: 1. use of high-cost, non-traditional mortgage products to purchase homes in high-cost markets that households simply could not afford; 2. use of high-cost mortgages to consolidate household debt; 3. declining home values that put homeowners “upside down” with their mortgage and lead to tightened credit standards that limit homeowners’ refinancing and resale opportunities. • The problem is primarily with higher cost, non-traditional types of loans Virginia’s foreclosure rate has increased sharply since mid 2005. The rise is attributable to poorly performing subprime, alt-A, and adjustable rate loans. Virginia Foreclosure Rates by Type of Loan 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 20 04 20 - 1 04 20 - 2 04 20 - 3 04 20 - 4 05 20 - 1 05 20 - 2 05 20 - 3 05 20 - 4 06 20 - 1 06 20 - 2 06 20 - 3 06 20 - 4 07 20 - 1 07 20 - 2 07 20 - 3 07 20 - 4 08 -1 Subprime & Alt-A Prime ARM Prime Fixed Rate Calendar Year Quarter Source: Mortgage Bankers Association (MBA) High-cost “subprime” and “alt-A” loans make up a large share of foreclosures 58% of foreclosures in March 2008 were on Virginia Foreclosures by Loan Type, March 2008 15% Prime & Govt. Fixed Rate Loans Subprime & Alt-A Loans Prime & Govt. Adjustable Rate Loans two types of non-traditional loans. 1. “Subprime” loans made to borrowers with low credit scores. Two-thirds of subprime loans in Virginia were used for cash-out refinancings. “Alt-A” loans made to borrowers with slightly tarnished credit and/or in need of special underwriting terms and conditions. A large share involved limited documentation. 2. Another 27% of foreclosures were on prime and government-backed ARM loans. Most of the alt-A and ARM loans were used in high-cost markets to enable borrowers to buy homes they otherwise could not afford. 58% 27% Generally, all three types of loans, when used for home purchase, had very high loan-to-value ratios. A large share were made with the expectation by both the lender and the borrower of being refinanced as soon as an anticipated rapid appreciation in home value created built-up equity. Source: Mortgage Bankers Association (MBA) Minority Homebuyers Depended Heavily on High Cost Mortgages How are foreclosures impacting the market? A build-up of REO properties puts downward pressure on home prices Relationship of REO Build-up & Existing Home Price Declines Prince William Manassas • Historically, home prices have been “sticky” during market downturns—i.e., price declines are retarded by an unwillingness of sellers to accept losses. • This has meant that price corrections often occur through depressed rates of appreciation over protracted periods of time. • However, REO build-ups can change that dynamic due to the pressure on lenders to turn over properties quickly even in the face of substantial losses. Loudoun Fairfax Arlington Alexandria Fredericksburg Area 0% 10% 20% 30% 40% 50% REOs as a share of active listings July 1, 2008 Annual decline in median home price July 2007-08 Source: MRIS and RealtryTrac.com Virginia now has a number of areas defined as “declining” markets • Private mortgage insurers and lenders are taking steps to mitigate financial risk by curtailing lending in markets where home values are declining. • “Declining” markets are being made subject to tighter underwriting standards, which are further reducing home sales and limiting the ability of at-risk borrowers to refinance out of troubled loans. Insurer Defined “Declining” Markets as of August 2008 Market Area Private Mortgage Insurers Defining Market as Declining Small Metro Markets:  Charlottesville MSA  Danville MSA Hampton Roads:  Virginia Beach-NorfolkNewport News MSA Greater Richmond:  Richmond MSA Northern Virginia:  Washington-ArlingtonAlexandria MSA  Winchester MSA AIG United Guaranty Genworth MGIC PMI Group, Inc. Radian RMIC Radian Genworth Radian Radian AIG United Guaranty Radian Price declines and foreclosures have become mutually reinforcing • Initially, weak housing market conditions resulted in declining rates of appreciation and, in time, actual declines in resale prices. • This stimulated foreclosures for at-risk borrowers who found themselves “upside down” with their mortgage and unable to refinance or sell. • As foreclosure activity became substantial, then large numbers of distressed sales further depressed market prices. • As REO inventories built, the pressure to lower prices became intense. • Sustained price declines weaken buyer confidence and cause lenders to tighten lending standards. In a worst case scenario, this creates a self-reinforcing downward cycle. What does the future hold for Virginia’s foreclosure problem? Current and historic trends suggest further price declines Annual Change in Home Prices 30% 25% 20% 15% 10% 5% 0% -5% -10% 78 19 4 79 19 4 80 19 4 81 19 -4 82 19 4 83 19 4 84 19 4 85 19 4 86 19 4 87 19 -4 88 19 4 89 19 4 90 19 4 91 19 4 92 19 4 93 19 -4 94 19 4 95 19 4 96 19 4 97 19 4 98 19 4 99 20 -4 00 20 4 01 20 4 02 20 4 03 20 4 04 20 4 05 20 4 06 20 -4 07 20 4 08 20 4 09 -4 19 Short Recession & Housing Recovery Recession & Prolonged Housing Recovery Credit Crunch & Recession Calendar Year Quarter Washington Source: OFHEO Richmond Hampton Rds There is particular pressure on lower-end prices Change in Existing Home Prices, Washington, DC MSA S&P Case-Shiller Monthly Home Price Index (January 2000=100) 350 300 250 200 150 100 50 0 End of 80's boom Decade of flat home values Start of 00's boom Surge in subprime and alt-A lending -14.7% Decline in Lower Tier index needed to restore historic price relationship Note: Tiered price breakpoints are as of May 2008 Ja n87 Ja n88 Ja n89 Ja n90 Ja n91 Ja n92 Ja n93 Ja n94 Ja n95 Ja n96 Ja n97 Ja n98 Ja n99 Ja n00 Ja n01 Ja n02 Ja n03 Ja n04 Ja n05 Ja n06 Ja n07 Ja n08 Lower Price Tier (<$327,470) Middle Price Tier ($327,470 to $467,335) Higher Price Tier (>$467,335) The following factors will contribute to how quickly markets rebound • An upturn in home sales will mark the bottom of the market—as unsold inventory declines, prices will stabilize and foreclosures ease. • Current data show most Virginia markets still experiencing declining home sales. However, in Northern Virginia steep price cuts are now contributing to a rebound in home sales. • The quicker that prices fall, the sooner that home sales and appreciation rates are likely to turn positive—more modest short-term price declines may contribute to prolonged price stagnation as occurred in Northern Virginia during the 1990’s. In NoVA, falling prices are now reviving existing home sales Existing Home Sales Northern Tier Region 8,000 7,000 6,000 5,000 4,000 3,000 2,000 Peak in May 2005 12-month rolling average 1,000 0 Trough in April 2008 Ja n99 Ju l-9 9 Ja n00 Ju l-0 0 Ja n01 Ju l-0 1 Ja n02 Ju l-0 2 Ja n03 Ju l-0 3 Ja n04 Ju l-0 4 Ja n05 Ju l-0 5 Ja n06 Ju l-0 6 Ja n07 Ju l-0 7 Ja n08 Ju l-0 8 Source: MRIS Rising home sales are reducing unsold housing inventory Months Supply of Unsold Homes Northern Tier Region 24 21 18 15 12 9 6 3 0 -04 r-04 ul-04 ct- 04 n-05 -05 ul-05 ct- 05 n-06 -06 ul-06 ct- 06 n-07 r-07 ul-07 ct- 07 n-08 r-08 ul-08 p pr pr an a a J J J J J O O O O J A J A J A Ja Ap Ja Ap Balanced Market INNER (Fairfax-Arlington-Alexandria) MIDDLE (Loudoun-Prince William-Manassas) OUTER (Fredericksburg-Culpeper-Winchester Areas) Source: MRIS A big factor in NoVA’s sales rebound is increased affordability • In 2000, affordability was a problem mainly inside the Beltway • At the peak of the boom, affordability pressures were severe even in the outer suburbs • Today, affordability is returning to preboom levels Ratio of Median Home Price to Median Household Income Arlington Alexandria Fairfax Loudoun Spotsylvania Pre-Boom: April 2000 Peak of Boom: May 2006 Post Boom: July 2008 Stafford Pr. William Historic affordability threshold 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Source: MRIS and Census Bureau REOs remain the primary drag and continue to put pressure on prices • In June, sharply declining home prices in NoVA markets reduced the number of bankowned properties (REOs). • But in July, an upturn in foreclosures and weaker sales quickly rebuilt REO inventories. • A further drop in prices is needed to reduce REOs and stabilize the market. Bank-owned Properties as a Share of Active Listings 70% 60% Prince WilliamManassas Share at Start of Month 50% 40% Loudoun ArlingtonAlexandria-Fairfax 30% Fredericksburg Area 20% 10% 0% Dec Jan Feb Mar Apr May Jun Jul Aug 07 08 08 08 08 08 08 08 08 Source: MRIS and RealtryTrac.com The impact of declining employment remains an unknown Annual Jobs Change in NoVA Foreclosure Hot Zone Prince William, Manassas, Loudoun & Stafford 15% 10% 5% 0% -5% -10% 3rd Qtr 2001 to 3rd Qtr 2002 to 3rd Qtr 2003 to 3rd Qtr 2004 to 3rd Qtr 2005 to 3rd Qtr 2006 to 3rd Qtr 2002 3rd Qtr 2003 3rd Qtr 2004 3rd Qtr 2005 3rd Qtr 2006 3rd Qtr 2007 (projected) All Employment Source: Bureau of Labor Statistics Construction Jobs Other markets are in an earlier phase of sales and price declines Existing Home Sales Index 1st Quarter 2000 = 100 200 No. Tier Peak = 05-2 Other Markets Peak = 06-2 Index (00-1 = 100) 150 100 50 0 -1 -1 -1 -1 -1 -1 -1 -1 00 01 02 03 04 05 06 07 Calendar Year Quarter Northern Tier Greater Richmond Hampton Rds-Ches Bay Balance of State 08 -1 What further risks lie ahead? 1. First, the length and severity of a recession is a major unknown. A layering of traditional economic foreclosure drivers on top of the current factors impacting the market will compound current weakness. 2. A second risk is REOs. July showed that REO inventories may quickly build now that the seasonal peak in sales is past. Such a build-up would reinforce current price cuts in NoVA and could stimulate significant price declines in other markets as well. 3. Finally, there is the ongoing risk of further trauma in the credit markets that would significantly reduce the availability of affordable home financing. It is essential that an adequate supply of affordable mortgage funds remain available to enable the market to recover.