Challenges ContinueFor a Recovery of

Virginia’s Mortgage Market

June 2009

Virginia’s mortgage debtproblem remains substantial and will take time to unwind

3

Loan performance continues to deteriorate at a significant rate

Source: Mortgage Bankers Association (MBA)

Share of Virginia Loans Seriously Delinquent(Loans 90+ Days Delinquent including Loans in Foreclosure Processing)

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

1980

-1

1981

-1

1982

-1

1983

-1

1984

-1

1985

-1

1986

-1

1987

-1

1988

-1

1989

-1

1990

-1

1991

-1

1992

-1

1993

-1

1994

-1

1995

-1

1996

-1

1997

-1

1998

-1

1999

-1

2000

-1

2001

-1

2002

-1

2003

-1

2004

-1

2005

-1

2006

-1

2007

-1

2008

-1

2009

-1

Calendar Year Quarter

4

Credit quality has weakenedover a prolonged period of time

• When long-term mortgages were mainly funded with short-term bank deposits, lenders maintained tight credit standards to off-set their interest rate risk.

• Starting in the late1970’s, the sale of loans on the secondary market grew substantially

• Securitization reduced interest rate risk and created latitude for lenders to progressively liberalize lending standards.

• Following the Tax Act of 1986, the rapid growth of home equity borrowing to support consumer spending added another element of credit risk.

5

Household mortgage debt has risen much faster than national GDP

Source: Bureau of Economic Analysis (BEA) and Federal Reserve

U.S. Home Mortgage Debt as a Share of GDP

20%

30%

40%

50%

60%

70%

80%

1978

   19

80   

   19

82   

   19

84   

   19

86   

   19

88   

   19

90   

   19

92   

   19

94   

   19

96   

   19

98   

   20

00   

   20

02   

   20

04   

   20

06   

   20

08   

6

A long-term rise in household debt was masked by rising home prices

• During the housing boom, steep rises in home prices allowed distressed borrowers to easily refinance their debts.

• This led to a falling rate of serious mortgage delinquency despite an ongoing decline in credit quality and growing levels of household debt.

• The reversal of home price appreciation eliminated refinancing as an “exit door”, and left distressed borrowers more prone to foreclosure.

7

A long-term decline in credit quality was masked by rising home prices

Source: Federal Housing Finance Authority (FFHA) and Mortgage Bankers Association (MBA)

0

25

50

75

100

125

150

175

200

1979

-1

1981

-1

1983

-1

1985

-1

1987

-1

1989

-1

1991

-1

1993

-1

1995

-1

1997

-1

1999

-1

2001

-1

2003

-1

2005

-1

2007

-1

2009

-1

Calendar Year Quarter

FH

FA

Ho

me

Pri

ce

Ind

ex

Vir

gin

ia

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Se

riou

s D

elin

qu

en

cy

Ra

teV

irgin

ia

Inflation-Adjusted Home Prices

Serious Delinquencies

RecessionInfluence

RecessionInfluence

Trendin Weaker

Credit Quality

Sharply higher prices enable refinancing

Virginia’s foreclosure problem first took holdin Northern Virginia

9

The onset of falling prices in NoVA was a trigger for rising foreclosures

• In 2007, foreclosures became a problem in NoVA following the onset of widespread price declines.

• The first wave of foreclosures was mainly adjustable rate subprime loans—a large share of which had their first payment reset between mid 2007 and late 2008.

• Prince William, Manassas and other submarkets with high concentrations of subprime loans were impacted first and hardest.

10

A drop in home prices lags well behind declining home sales

• Declining home sales bring an end to price appreciation.

• However, most sellers will wait a long time before they are willing to significantly cut their asking price.

• Not until there is a large inventory of unsold homes will competition lead to a meaningful reduction in prices.

• Even then, it takes large numbers of “distressed” sales to push prices significantly lower.

• In the current market, the lag time between the initial downturn in sales and beginning of a meaningful drop in prices has been two full years.

11

The Prince William area illustrates the pattern seen in Virginia markets

Source: MRIS

Prince William Market Area

$0

$100,000

$200,000

$300,000

$400,000

$500,000

Apr-9

9

Apr-0

0

Apr-0

1

Apr-0

2

Apr-0

3

Apr-0

4

Apr-0

5

Apr-0

6

Apr-0

7

Apr-0

8

Apr-0

9

Me

dia

n E

xis

tin

g H

om

e P

ric

e

0

300

600

900

1,200

1,500

Ex

istin

g H

om

e S

ale

s(12-m

on

th ro

lling

average)

25 monthsAug 2007Jul 2005

Home Sales

Home Prices

12

At the start of 2008, foreclosureswere heavily concentrated in NoVA

Source: ReatyTrac

Foreclosure ActivityJanuary through April 2008

Number of homes lenders sold

at auction or took ownership of

Less than 25

25-100

101-200

201-400

Greater than 400

Now, downstate markets are beginning to see significant increases in foreclosures

14

In 2009, foreclosures are impactinga widening number of local markets

Source: RealtyTrac

Foreclosure ActivityJanuary through April 2009

Number of homes lenders sold

at auction or took ownership of

Less than 25

25-100

101-200

201-400

Greater than 400

15

The housing decline in downstate markets is trailing NoVA by a full year

Source: Virginia Association of Realtors

Existing Home Sales Index

50

75

100

125

150

03-1

03-2

03-3

03-4

04-1

04-2

04-3

04-4

05-1

05-2

05-3

05-4

06-1

06-2

06-3

06-4

07-1

07-2

07-3

07-4

08-1

08-2

08-3

08-4

09-1

Calendar Year Quarter

Ind

ex

(0

3-1

= 1

00

)

Northern Tier Greater Hampton Rds Greater Richmond Balance of State

Northern Tier Peak = 2nd Qtr 2005 Other Markets Peak = 2nd Qtr 2006

12 mos.

16

Late 2008 marked the onset of price declines in many downstate markets

• Until recently, most downstate areas with high concentrations of subprime loans experienced fewer foreclosures than NoVA because their home prices remained relatively stable.

• Since late 2008, downstate housing markets have seen a steep up-tick in foreclosure activity as price declines have become prevalent.

• Rising foreclosure rates reinforce declining home prices, creating a reinforcing cycle—Consequently, foreclosures will likely continue to rise until home prices stabilize

17

Virginia’s foreclosure problem isnow becoming more broad-based

• While subprime loans remain a serious problem, a second wave of payment resets is now causing “option payment ARMs” and “alt-A” loan foreclosures to rise.

• In addition, the impact of the recession is beginning to increase default levels among borrowers with traditional fixed-rate mortgage loans.

• Consequently, foreclosures are no longer mainly NoVA or subprime problems.

• They are now a broad-based issue impacting a wide array of communities and borrowers.

Virginia’s Northern Tieris seeing a return to

market fundamentals

19

Lower-end prices—inflated by relaxed underwriting—have returned to norms

Note: Tiered price breakpoints are as of March 2009

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

0

50

100

150

200

250

300

350

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Lower Price Tier (<$265,893) Middle Price Tier ($265,893 to $408,920) Higher Price Tier (>$408,920)

Surge in subprimeand alt-A

lending

20

Prices appear to be stabilizing, having fallen to pre-boom levels

Source: MRIS

Median Existing Home PricePrince William Market Area

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

Apr-98

Oct-98

Apr-99

Oct-99

Apr-00

Oct-00

Apr-01

Oct-01

Apr-02

Oct-02

Apr-03

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Nominal $

Jan 98 $

-59%

21

In NoVA, falling prices have spurred a rebound in 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

Apr-99

Oct-99

Apr-00

Oct-00

Apr-01

Oct-01

Apr-02

Oct-02

Apr-03

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

12-month rolling average

Peak inMay 2005

Trough in April 2008

22

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

8Jul-0

8Oct-

08Jan-09

Apr-09

INNER (Fairfax-Arlington-Alexandria)

MIDDLE (Loudoun-Prince William-Manassas)

OUTER (Fredericksburg-Culpeper-Winchester Areas)

Balanced Market

23

A big factor in NoVA’s salesrebound 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 in the outer suburbs has returned to pre-boom levels

Source: MRIS and Census Bureau

Ratio of Median Home Price toMedian Household Income

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Pr. William

Spotsylvania

Stafford

Loudoun

Fairfax

Arlington

Alexandria

Pre-Boom:April 2000

Peak of Boom:May 2006

Post Boom:April 2009

Historic affordability threshold

What does the future hold for Virginia’s foreclosure problem?

25

Problem loans and unemploymentwill keep defaults high for some time

• The huge wave of defaults due to payment resets on subprime loans is now waning.

• However, a second wave of payment resets on “option payment ARMs” and “alt-A” loans will begin in late 2009 and extend through 2011.

• This second wave of potential defaults will coincide with the likely impact of rising unemployment on borrowers’ ability to repay.

26

The wave of subprime resets is ending, but other loan types are now at risk

Source: Credit Suisse, IMF Global Financial Stability Report, September 2007

27

Foreclosures are stabilizing in areas hard-hit by subprime defaults in 2008,

but are increasing in other markets

Source: RealtyTrac

Year-over-year change in number of homes

lenders sold at auction or took ownership of

Decrease in Foreclosures

Negligible Change

Increase in Foreclosures

Year-Over-Year Changein Foreclosure Activity

Jan-Apr 2008 versus Jan-Apr 2009

28

Now, foreclosures are rising in areas with concentrations of “alt-A” loans

Source: RealtyTrac

ForeclosuresJan - Apr 2009

Number of homes lenders sold

at auction or took ownership of

Less than 25

26 - 100

101 - 200

201 - 400

Greater than 400

Alt-A Loans (Owner Occupied)

0 - 65

66 - 200

201 - 400

401 - 800

801 - 1,509

Alt-A LoansOct 2007

29

Fixed-rate loan defaults are also rising due to unemployment and falling equity

Source: Mortgage Bankers Association (MBA)

Subprime Foreclosures

Prime & Govt. ARM Foreclosures

Prime & Govt. Fixed Rate Foreclosures

Virginia Foreclosures

Change 2008 to 2009+ 1,700

+ 3,900

+ 4,300

1st Qtr. 200927,900 Active Foreclosures

28%

30%

42%

Prime &Govt. Fixed Rate Loans7,800

Prime & Govt. Adjustable Rate Loans8,400

Subprime & Alt-A Loans

11,700

1st Qtr. 200818,000 Active Foreclosures

19%

25%

56%

Prime &Govt. Fixed Rate Loans3,500

Prime & Govt. Adjustable Rate Loans

4,500

Subprime & Alt-A Loans

10,000

30

Unemployment has increased substantially throughout Virginia

Source: Virginia Employment Commission

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%

Washington, DC (VA pt)

Charlottesville

Harrisonburg

Hampton Roads (VA pt)

Roanoke

Lynchburg

Richmond

Winchester (VA pt)

Kingsport-Bristol (VA pt)

Blacksburg

Danville

April 2009 April 2008

Unemployment Rates for Virginia's Metropolitan Areas

31

Historically, rising unemployment leads to increased loan defaults

• Unemployment is strongly correlated with rising mortgage defaults.

• Usually, there is a lag between the initial rise in unemployment and an increase in default rates, because borrowers first exhaust public benefits and savings before they miss payments.

• There is often a longer lag between the peak in default rates and the peak in unemployment, because at the highest levels of unemployment people are out of work for an extended time.

32

Default rates may continue to riseeven past the peak in unemployment

Source: Bureau of Labor Statistics (BLS) and Mortgage Bankers Association (MBA)

Experience of Last Major Recession in Early 1990's

0.75%

1.00%

1.25%

1.50%

1.75%

1990

-1

1990

-2

1990

-3

1990

-4

1991

-1

1991

-2

1991

-3

1991

-4

1992

-1

1992

-2

1992

-3

1992

-4

1993

-1

1993

-2

1993

-3

1993

-4

1994

-1

1994

-2

1994

-3

1994

-4

Calendar Year Quarter

Se

rio

us

De

linq

ue

nc

y R

ate

(4-q

uar

ter

roll

ing

ave

rag

e)

3.0%

4.0%

5.0%

6.0%

7.0%

Un

em

plo

ym

en

t Ra

te(4-q

uarter ro

lling

average)

Serious Delinquencies

Unemployment

15 months

Peak in3rd Quarter 1992

Peak in4th Quarter 1993

33

Prices have not yet fully correctedin some downstate market areas

• Despite recent declines, home prices remain high relative to incomes in some downstate areas

• During 2009, historically low interest rates will provide temporary price support to offset otherwise weak demand

• Nevertheless, downward price pressure should continue to be felt—especially in the Hampton Roads and Charlottesville, market areas

Source: VAR and Census Bureau

Historic affordability threshold

Ratio of Median Home Price toMedian Household Income

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Danville

Lynchburg

Roanoke

Richmond

Hampton Rds

Charlottesville

Pre-Boom: April 2000

Peak of Boom:June 2007

Post Boom: 1st Quarter 2009

34

The downstate share of foreclosure auctions is rising, but there continues to be a lesserbuild-up of foreclosed homes than in NoVA

Source: RealtyTrac

Regional Distribution of Virginia Foreclosure Activity

June 2008 June 2009

1.5%

2.8%

8.4%

12.7%

2.3%

10.4%

8.7%

21.4%

OtherDownstate

Regions

GreaterRichmond

Region

HamptonRds- Ches.Bay Region

TotalDownstate

Share

Inventory of Foreclosed Homes Foreclosure Auction Notices

2.9%

5.9%

16.5%

25.3%

7.5%

13.1%

18.2%

38.8%

35

Foreclosed homes remain a major drag on NoVA’s market recovery

• In 2008, NoVA’s inventory of foreclosed homes increased rapidly and dominated sales activity.

• The inventory has dropped since December but is still extremely high.

Source: MRIS and RealtryTrac

Ratio of Lender-owned Homes toMLS Active Home Listings

Northern Tier Region

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Dec 0

7

Jan

08

Feb 0

8

Mar

08

Apr 0

8

May

08

Jun

08

Jul 0

8

Aug 0

8

Sep 0

8

Oct 0

8

Nov 0

8

Dec 0

8

Jan

09

Feb 0

9

Mar

09

Apr 0

9

May

09

Sh

are

at S

tart

of

Mo

nth

36

Rising foreclosures are slowingthe decline in lender-owned homes

Source: RealtyTrac

Northern Tier Region Foreclosure Activity

0

3,000

6,000

9,000

12,000

15,000

18,000

Nov-2

3-07

Feb-1

-08

Mar

-6-0

8

Apr-2

-08

May

-6-0

8

Jun-

3-08

Jul-1

-08

Aug-3

-08

Sep-4

-08

Oct-1-

08

Oct-31

-08

Dec-1

-08

Jan-

7-09

Feb-1

-09

Mar

-1-0

9

Apr-7

-09

May

-1-0

9

Jun-

1-09

Foreclosure Auction Notices

Inventory of Foreclosed Homes

+ 71%

Year-to-Date 2009

37

The impact of foreclosed homes on local communities is expected to be

concentrated in the Northern Tier

Source: U.S. Department of Housing and Urban Development (HUD)

Census Tracts Eligible forNeighborhood Stabilization

Program 2nd Round Funding

Eligible based on foreclosures

Eligible based on vacancies

Eligible based on both factors

Eligibility based on foreclosures reflects several risk factors as well as actual current foreclosed home inventories.________________________________________________________________________

38

The following factors will contributeto how quickly markets rebound

1. An upturn in sales marks the bottom of the market— As unsold inventory declines, prices will stabilize.

– In NoVA, steep price cuts have contributed to a rebound in sales activity, declining inventory, and a bottoming-out of prices.

– However, most downstate markets are still experiencing declining home sales and prices.

2. Price stability will ease foreclosures, but high default rates are likely to continue until the second wave of loan resets is past and unemployment levels begin to fall.

– Increased sales will not significantly reduce the inventory of foreclosed homes until the default rate declines

– Therefore, continued high inventories of foreclosed homes remain the primary obstacle to market recovery

39

What further risks lie ahead?

1. The length and severity of the recession remains an unknown. A layering of unemployment on top of current default factors will compound defaults.

2. A continued build-up of lender-owned homes will reinforce current price declines, destabilize neighborhoods, and inhibit market recovery.

3. 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 increased sales.