Overview of Virginia’s Foreclosure Problem

July 23, 2008

What is the size and extent of Virginia’s foreclosure problem?

Virginia’s foreclosure rate is nearlyhalf the U.S. rate, but has risen rapidly

Source: Mortgage Bankers Association (MBA)

Foreclosure Rate at End of Quarter

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1989

-4

1990

-4

1991

-4

1992

-4

1993

-4

1994

-4

1995

-4

1996

-4

1997

-4

1998

-4

1999

-4

2000

-4

2001

-4

2002

-4

2003

-4

2004

-4

2005

-4

2006

-4

2007

-4

Calendar Year Quarter

U.S.

Virginia

Northern Virginia’s problem is worse than elsewhere in the state

Area estimates are based on data from the MBA and First American LoanPerformance

Estimated Foreclosure Rates as of March 31, 2008

0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Bluefield MSA (VA part)

Blacksburg-Christiansburg-Radford MSA

Kingsport-Bristol MSA (VA part)

Harrisonburg MSA

Charlottesville MSA

Staunton-Waynesboro MSA

Danville MSA

Lynchburg MSA

Non-metropolitan areas

Roanoke MSA

Martinsville MSA

Richmond MSA

VA Beach-Norfolk-Newport News MSA (VA part)

VIRGINIA

Washington-Arlington-Alexandria MSA (VA part)

Winchester MSA (VA part)

Culpeper MSA

U.S.

But, there is significant variance in rates among localities within NoVA

Local estimates are based on data from the MBA, RealtyTrac.com and First American LoanPerformance

Estimated Foreclosure Rates as of March 31, 2008

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

Arlington, Alexandria, Falls Church

VIRGINIA

Fairfax City & Co.

Fauquier, Clarke, & Warren

Loudoun County

Washington-Arlington-Alexandria MSA (VA part)

Stafford, Spotsylvania, & Fredericksburg

Winchester MSA (VA part)

Culpeper MSA

U.S.

Prince William, Manassas, & Manassas Park

Foreclosure “hot spots” in NoVA have large, growing minority populations

3 10 11 13 23Manassas Park City

Pr. William County

Manassas City

Loudoun County

Stafford County

+18.1% +12.9% +12.6% +12.1% +9.2%

Minority percentage of total population 2000 2006

RANK AMONG TOP 25 JURISDICTIONS NATIONALLY IN RATE OF MINORITY POPULATION GROWTH

32.234.8 33.2

20.0 19.7

50.347.7 45.8 44.9

28.9

Hampton Roads’ problem is highly focused in Norfolk and VA Beach

Local estimates are based on data from the MBA, RealtyTrac.com and First American LoanPerformance

Estimated Foreclosure Rates as of March 31, 2008

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

Wmsbg., Jms. Cty., York, Poq., Glouc., & Math.

Newport News City

Chesapeake City

Hampton City

Suffolk, Isle of Wight, & Surry

Portsmouth City

VA Beach-Norfolk-Newport News MSA (VA part)

VIRGINIA

Virginia Beach City

U.S.

Norfolk City

Richmond’s problem is focused in the city and adjacent county areas

Local estimates are based on data from the MBA, RealtyTrac.com and First American LoanPerformance

Estimated Foreclosure Rates as of March 31, 2008

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

Cumberland, Amelia, Powhatan, Goochland & Louisa

Prince George, Dinwiddie, & Sussex

New Kent, Charles City, King William, & King and Queen

Petersburg, Hopewell, Colonial Heights

Hanover County

Richmond MSA

Chesterfield County

Henrico County

VIRGINIA

Richmond City

U.S.

Caroline CountyNote: 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.

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.

Source: Mortgage Bankers Association (MBA)

Virginia Foreclosure Rates by Type of Loan

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

2004

-1

2004

-2

2004

-3

2004

-4

2005

-1

2005

-2

2005

-3

2005

-4

2006

-1

2006

-2

2006

-3

2006

-4

2007

-1

2007

-2

2007

-3

2007

-4

2008

-1

Calendar Year Quarter

PrimeFixed Rate

Subprime& Alt-A

Prime ARM

High-cost “subprime” and “alt-A” loans make up a large share of foreclosures

58% of foreclosures in March 2008 were on 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.

2. “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.

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.

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)

Virginia Foreclosures by Loan Type,

March 2008

15%

27%58%

Prime &Govt. Fixed RateLoans

Prime & Govt. Adjustable Rate Loans

Subprime & Alt-A Loans

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

• 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.

Source: MRIS and RealtryTrac.com

Relationship of REO Build-up & Existing Home Price Declines

0% 10% 20% 30% 40% 50% 60% 70%

FredericksburgArea

FairfaxArlington

Alexandria

Loudoun

Prince WilliamManassas

REOs as a share of active listings June 1, 2008

Annual decline in median home price June 2007-08

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 July 2008

Market Area

Private Mortgage Insurers Defining Market as Declining

Small Metro Markets:

Charlottesville MSA

Radian

Danville MSA AIG United Guaranty Radian

Hampton Roads:

Virginia Beach-Norfolk-Newport News MSA

Genworth MGIC Radian

Greater Richmond:

Richmond MSA

MGIC Radian

Northern Virginia:

Washington-Arlington-Alexandria MSA

Winchester MSA

AIG United Guaranty Genworth MGIC PMI Group, Inc. Radian RMIC

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

Source: OFHEO

Annual Change in Home Prices

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1978

-4

1979

-4

1980

-4

1981

-4

1982

-4

1983

-4

1984

-4

1985

-4

1986

-4

1987

-4

1988

-4

1989

-4

1990

-4

1991

-4

1992

-4

1993

-4

1994

-4

1995

-4

1996

-4

1997

-4

1998

-4

1999

-4

2000

-4

2001

-4

2002

-4

2003

-4

2004

-4

2005

-4

2006

-4

2007

-4

2008

-4

2009

-4

Calendar Year Quarter

Washington Richmond Hampton Rds

ShortRecession& Housing Recovery

Recession& Prolonged

Housing Recovery

Credit Crunch &

Recession

There is particular pressureon lower-end prices

Note: Tiered price breakpoints are as of April 2008

Change in Existing Home Prices, Washington, DC MSAS&P Case-Shiller Monthly Home Price Index (January 2000=100)

0

50

100

150

200

250

300

350

Jan-8

7Ja

n-88

Jan-8

9Ja

n-90

Jan-9

1Ja

n-92

Jan-9

3Ja

n-94

Jan-9

5Ja

n-96

Jan-9

7Ja

n-98

Jan-9

9Ja

n-00

Jan-0

1Ja

n-02

Jan-0

3Ja

n-04

Jan-0

5Ja

n-06

Jan-0

7Ja

n-08

Lower Price Tier (<$327,963) Middle Price Tier ($327,963 to $467,139) Higher Price Tier (>$467,139)

Decade of flat home values

-17.6%End of80's boom

Start of00's boom

Surge in subprimeand alt-A

lending

Decline in Lower Tier

index needed to restore

historic price relationship

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

Source: MRIS

Existing Home SalesNorthern Tier Region

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Jan-99

Jul-9

9

Jan-00

Jul-0

0

Jan-01

Jul-0

1

Jan-02

Jul-0

2

Jan-03

Jul-0

3

Jan-04

Jul-0

4

Jan-05

Jul-0

5

Jan-06

Jul-0

6

Jan-07

Jul-0

7

Jan-08

12-month rolling average

Peak in May 2005

Trough in April 2008

Rising home sales are reducing unsold housing inventory

Source: MRIS

Months Supply of Unsold HomesNorthern Tier Region

0

3

6

9

12

15

18

21

24

Jan-04Apr-0

4Jul-0

4Oct-

04Jan-05

Apr-05

Jul-05

Oct-05

Jan-06Apr-0

6Jul-0

6Oct-

06Jan-07

Apr-07

Jul-07

Oct-07

Jan-08Apr-0

8

INNER (Fairfax-Arlington-Alexandria)

MIDDLE (Loudoun-Prince William-Manassas)

OUTER (Fredericksburg-Culpeper-Winchester Areas)

Balanced Market

Falling prices are also starting to reduce the impact of REOs

• The sharp decline in home prices in NoVA markets is starting to reduce the inventory of bank-owned properties (REOs).

• Over time, this will help stabilize prices.

Source: MRIS and RealtryTrac.com

Bank-owned Properties asa Share of Active Listings

0%

10%

20%

30%

40%

50%

60%

70%

Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08

Sh

are

at S

tart

of

Mo

nth

Fredericksburg Area

Prince William-Manassas

Arlington-Alexandria-Fairfax

Loudoun

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 pre-boom levels

Ratio of Median Home Price toMedian Household Income

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Pr. William

Stafford

Spotsylvania

Loudoun

Fairfax

Arlington

Alexandria

Pre-Boom:April 2000

Peak of Boom:May 2006

Post Boom:June 2008

Historic affordability threshold

Source: MRIS and Census Bureau

However, the impact of declining employment is a big unknown

Source: Bureau of Labor Statistics

Annual Jobs Change in NoVA Foreclosure Hot ZonePrince William, Manassas, Loudoun & Stafford

-10%

-5%

0%

5%

10%

15%

3rd Qtr 2001 to 3rd Qtr 2002

3rd Qtr 2002 to 3rd Qtr 2003

3rd Qtr 2003 to 3rd Qtr 2004

3rd Qtr 2004 to 3rd Qtr 2005

3rd Qtr 2005 to 3rd Qtr 2006

3rd Qtr 2006 to 3rd Qtr 2007(projected)

All Employment Construction Jobs

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. While REO inventories are beginning to decline, they could quickly rebuild now that the seasonal peak in sales is past. Such a build-up would reinforce 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.