Outlook for Housing Finance. Susan F. Dewey Executive Director Virginia Municipal League Annual Conference October 19, 2009. The General Assembly established VHDA in 1972 as a self-supporting State Authority—We receive no state appropriations.
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Outlook forHousing Finance
Susan F. Dewey
Virginia Municipal League
October 19, 2009
The General Assembly established VHDA in 1972 as a self-supporting State Authority—We receive no state appropriations.
Our mission is to “help low and moderate-income Virginians attain quality, affordable housing.”
We provide mortgage loans primarily to first-time home buyers and to finance affordable rental housing.
Our capital is raised from private investors through the sale of tax-exempt and taxable notes and bonds.
We complement and support the activities of the private housing industry.
The vast majority of home loans are being funded through Fannie Mae, Freddie Mac and Ginnie Mae.
POSITIVE: Federal support remains necessary to help stabilize home sales and prices.
NEGATIVE: Direct federal purchase of GSE securities artificially lowers their lending rate, which inhibits the ability of private markets to fully recover.
This impedes the sale of both private mortgage-backed securities and tax-exempt mortgage bonds.
Private mortgage insurers have significantly tightened loan requirements and curtailed new business, leaving FHA as the primary credit support for first-time homebuyers.
VHDA and other affordable housing lenders are weathering this “temporary” market environment by successfully transitioning to almost exclusive reliance on FHA and Ginnie Mae.
There is growing concern about rising FHA losses and how well the market can again transition when federal support begins to retrench in 2010.
Source: Mortgage Bankers Association (MBA)
Source: Mortgage Bankers Association (MBA)
Source: Credit Suisse, IMF Global Financial Stability Report, September 2007
Unemployment and loss of income are now the primary drivers of default and foreclosure.
Excessive household debt is also a major issue. Household “de-leveraging” remains difficult and painful.
VHDA continues to actively support the work of the Virginia Foreclosure Prevention Task Force (VFPTF) in mitigating the impact of foreclosures on households and local communities.
VFPTF’s website is Virginia’s main portal for information and assistance: www.virginiaforeclosureprevention.com
In June, VHDA initiated a “Homebuyer Tax Credit Plus” program to assist first-time homebuyers in using the $8,000 federal stimulus tax credit.
VHDA provides a second mortgage on FHA loans for down payment and closing costs at 0% interest with no payments for the first12 months.
The borrower can either repay the loan from the proceeds of their federal tax credit, or else choose to have the loan amortized over 30-years at the same interest rate as the first mortgage.
VHDA is also providing permanent mortgage financing to support the federal Neighborhood Stabilization Program (NSP).
Home sales bottomed out in spring 2008 and have risen due to investor purchases of distressed homes.
Prices stabilized in early 2009 and have rebounded modestly due to a sharp reduction in unsold inventory.
Nonetheless, the recovery remains fragile.
The region’s foreclosure rate remains extremely high—Consequently, there are over 12,000 foreclosed homes still waiting to be sold.
Region-wide, home sales have recently flattened—In some localities, sales are again declining—Sales volume is at the same level as a decade ago.
In 2009, sales and prices have continued to decline while Northern Virginia has been slowly recovering.
Downstate home sales now appear to be bottoming out, but prices will likely fall further.
Foreclosure rates and distressed home inventories are not nearly as high as in Northern Virginia, but have continued to increase at a steady rate.
Unemployment will remain a serious drag on recovery—especially in downstate markets—and will continue to impact mortgage performance.
Rising mortgage defaults and foreclosures will continue to feed the large inventory of distressed properties. It will take significant time to reduce this inventory even after default rates stabilize.
It will also take time to transition the mortgage market off federal support, and for household income and confidence to recover.
Part of the run-up in prices at the peak of the boom was generated by sub-prime and other “exotic” loan products that artificially inflated buying power by up to 25 percent.
Those loan products are now gone from the market and are unlikely to return.
This is why price declines are national rather than local as in normal downturns.
A return of balance in supply and demand will not fully regain lost ground—We are unlikely to see a return of the artificial values experienced from 2004 to 2007 for a long time to come.
Not everyone is ready for homeownership.
Financial literacy is crucial to household well-being.
Debt must be prudently used and managed, and should never become a substitute for savings.
Loans must be fully underwritten and documented based on a borrower’s current ability to repay—Expectations of rising asset values should not play a role in borrower qualification.
Interest rate risk is real—Most homebuyers benefit from reliance on fixed rate loan products, which provide long-term stability in housing costs.
The primary value of ownership is security of tenure and control of one’s living environment—not the expectation of significant capital gain.
The severe affordability gap experienced at the height of the boom has now eased but not gone away.
In most markets, the ratio of median home price to median income has fallen back to more normal levels.
However, this has been off-set by significant tightening of underwriting standards, some of which will remain long term.
The demographic drivers of demand are changing.
Household growth is shifting from affluent middle age homeowners to younger households and seniors.
This is shifting demand from larger “trade up” homes to more compact and affordable rental and home purchase options.
We are now entering a new market cycle in which young households, empty nesters and younger retirees will dominate.
Source: U.S. Census and estimates based on Census Bureau and VEC Virginia population projections
Neither mortgage market conditions nor housing demand will support a return to development patterns of the past decade.
Localities and developers will have to work together to find feasible and sustainable means of accommodating emerging housing needs—especially the need for affordable rental housing.
VHDA is positioning itself to help support the transition from today’s difficult housing environment to a future where the needs of younger and older households will eclipse those of households in their middle years.
We are actively working with VML, VaCO, local planners, the Virginia Chapter of the American Planning Assoc. (VAPA), the Urban Land Institute (ULI), and industry stakeholders to promote:
Mixed use/mixed income development models and better linkage of housing with economic development and transportation planning
Housing accessibility and Universal Design to assure that the housing stock can meet the needs of all groups and remain viable as the population ages
Green building to assure that residential development supports healthy, sustainable communities