WINTER 2009

INSIDE THIS ISSUE

Housing Sector page 1
TARP page 2
Tax Credits page 3
CENTURY 21 NEW MILLENNIUM | THE PATH HOME Summary page 4

DEAR NEIGHBOR,
“Real Estate is Great at CENTURY 21 New Millennium!”
“We at New Millennium are focused on transforming
the real estate industry by integrating and efficiently
delivering those services our clients value. We are
known for being forward-thinking and for the passion-
ate pursuit of our goals. We endeavor to create an
environment in which we all grow individually and as
a team. We work hard, innovate, communicate hon-
Tony Lopez estly, and choose the harder-right rather than the
Realtor/ Consultant easier-wrong. For all involved, we strive to do every-
thing in a way that is fun, fair and profitable.”
and policy which influence our client’s contemplated trans-
action. We’ve acquired firms and expanded our footprint in
market conditions which caused others to fail. We’ve
“integrated and efficiently delivered those services our
clients value.” Firms that don’t lend, provide title and es-
crow services, insure or manage property are simply not
prepared to fulfill their client’s needs. Now is no time to do
business with strangers. Sometimes the “harder-right” is
recommending our client not complete a transaction which
would have paid a commission. Our success is due to rela-
tionships of trust and we will not violate that trust; period.

5990 Kingstowne Towne Center

At no time since our firm was established in 1998, has living
Alexandria, VA 22315
our “Mission Statement” been more impactful than this
Office: 703-822-2344 current market cycle. Because “We work hard, innovate,
communicate honestly, and choose the harder-right
tony.lopez@c21nm.com
rather than the easier-wrong,” our business is up thirty
http://tonylopez.c21nm.com two percent over the prior year. The market we compete in
is not. We’ve “grown individually and as a team.” We’ve
703-963-3208 worked hard to understand and communicate data, trends
It is hard to believe this cycle began in July of 2005 and
it will soon be 2010. Home values remain at the center
of the economic universe. Lawmakers likely have more
influence upon the value of your property than do the
number of bedrooms and baths. In this issue, we’ll pro-
vide information that will help you align the moving parts
and hopefully develop a strategy relative to your real
property holdings. It’s no longer that simple.

THE GOVERNMENT’S ROLE IN THE HOUSING SECTOR

This economic cycle began when the “Housing
Bubble” burst and we can’t expect sustainable
recovery until real property values improve. When
home values began to decline, accounting stan-
dards required that financial institutions mark their
assets at fair market value. While declines were
modest initially, as inventory swelled, buyers lost
confidence and the housing sector ground to a halt.
Home prices then began their freefall.
Throughout the boom, lenders made mortgages
which relied more on the appreciating value of the
home than they did the credentials of the borrower.
There was little risk since prices were on the rise
and if the borrower had problems, they could sell or
refinance. On a worst case basis where the lender
had to foreclose, they were claiming an asset that
likely was worth more than the loan amount.
Obviously, that’s not the way things worked out.
Values plummeted. Those owning the mortgages
were then forced to mark the value of their collateral
at the diminished market value. This undermined
capital ratios and put the nation’s largest financial
institutions on the brink of failure; some failed.
The Federal government stepped in with TARP and
suspended the “Mark to Market” accounting stan-
dard. Since TARP didn’t buy the bad assets and
instead recapitalized the banks, the impact of the
problem was merely postponed. Lending dried up,
businesses contracted and started cutting jobs.
Those that lost their jobs then lost their homes.
Foreclosures were then sold at distressed levels
which set the new value for like property and the
spiral continued downward. A substantial percent-
age of homeowners are now “upside down” on their
mortgage. Estimates of bank’s potential unrecog-
nized losses are now expressed in multiples of our
nations Gross National Product. It is hard to com-
prehend the scale of risk.
If managed properly, we have now weathered
the worst of the storm. Government programs are
in place that encourage foreclosure as a last resort
which limits inventory. Incentives for those qualified
to buy a home are working. Values in many markets
are stable. That doesn’t mean the problem is
solved; just solvable.
Banks are no longer eager to take a home and sell
it as quickly as possible because values are no
longer eroding. Keeping someone in their home and
parceling out inventory only when forced to will limit
inventory and strengthen values. In an appreciating
market, borrowers are more inclined to stay the
course. Lenders’ balance sheets improve. Govern-
ment can pull back on their involvement.
While government intervention with taxpayer dollars
was distasteful, once the decision to save the banks
was made, there was no turning back. If we remem-
ber that the fundamental cause of the banking crisis
was the deterioration of home values, then it only
makes sense that purging the bad assets over an
protracted period of time will prevent further deteriora-
tion of values. This is the only sustainable recovery
alternative. The paper loss was just too large. Even
our government is not large enough to call a “do over.”
1
MARKET TRENDS | SELLER’S CONSIDERATIONS

POLICY, PROGRAMS AND PERSPECTIVE

TARP, the “Toxic Asset Relief Program” was originally intended to purchase
the toxic assets (under collateralized and non-performing mortgage loans)
from banks that did not meet capital ratios and therefore were at risk of being
deemed insolvent. Instead, these taxpayer dollars were used to acquire eq-
uity stakes in banks, restoring these banks’ reserve requirements. The toxic
assets remain toxic and on the books of the banks.
Banks that received TARP funds took on an “implied” accountability to the
Federal Government. Incentives were then put in place designed to encour-
age banks to seek alternatives to foreclosure. Modifying loans would keep the
homeowner in the property and have a limiting influence on the amount of
inventory on the market. Banks felt as if modifications were merely postpon-
ing the inevitable and they would find themselves foreclosing on these homes
at a lower value than when the loan was modified. Modification activity has
increased but it remains to be seen whether the intended benefit is lasting.
It is estimated that somewhere between 28% and 48% of homeowners na-
tionally are “upside down” (owe more than their home is worth). To avoid
massive defaults, the government continues to implement programs designed
to offer alternatives to foreclosure, keeping these homes from hitting the mar-
ket and re-inflating inventory. Borrowers facing unemployment, divorce or
other financial challenges now have more alternatives to default. Alternatives
to foreclosure are critical to the continued stabilization of home values.
While effective in stabilizing participating banks, TARP left the toxic assets on the
balance sheets of at risk banks. This treated the symptom, not the disease. Banks
holding nonperforming loans are no longer required to price these assets at “fair
market value;” unless an event occurs which diminishes the face value of the loan.
Foreclosure and short sale transactions are two such events, thus requiring banks
to record the actual loss. Loan modification keeps the borrower in the home and in
most cases, will allow the bank to keep the asset on their books at face value.
Legislators expect “TARP banks” to place priority upon modifying loans rather
than foreclosing. This expectation will have a limiting effect on inventory levels,
support value restoration and improve the position of at risk homeowners and
banks. Every dollar of home price appreciation is one less dollar of “toxic asset.”

CONTINGENT RISK
When the housing bubble burst, many blamed the resets of adjustable rate mortgages. As you can
see in the graph to the right, we are now through the bulk of the sub-prime resets. What we are now
facing is likely the most challenging reset; the Option Adjustable Arm.

These are loans that not only featured an adjustable rate, but allowed the borrower to select a mini-
mum payment that was less than the interest payment, adding to the principal balance monthly.
Many of these borrowers will soon see their minimum payment increase substantially and will not be
eligible to refinance because they owe considerably more than their home is worth. Regardless of
their qualifications, this is the segment of borrowers most likely to strategically default rather than
make huge payments on an asset not worth what they owe.

Since TARP did not buy these mortgages, it will be up to the banks to deal with these assets. This is
the segment where merely resetting an interest rate to a low fixed rate might not be enough to keep
the borrower interested. These are the borrowers most likely to owe twice what their home is worth.

The good news: if we can navigate through these resets without having inventory levels spike, home
values will remain stable and begin to appreciate modestly. Banks are happy to keep people in their
homes so long as values are not declining. We will have cleared the bulk of the risk by 2012, result-
ing in a return to a housing market which can stand on it’s own.

ALTERNATIVES TO FORECLOSURE OR SHORT SALE

Loan Modification: Typically, banks are offered incentives to modify a loan to a
fully amortizing, fixed rate program with a payment that does not exceed 31% of
the gross household income. This can be accomplished by lowering the interest
rate to as low as 2% and stretching repayment out to as long as forty years.
Rarely have we seen banks reduce a principal balance, but this may become
necessary in order to avoid catastrophe with Option Arm resets. There are cur-
rently no government programs that meaningfully subsidize principal write-down.
Deed For Lease: This is a relatively new program offered by Fannie Mae.
It requires that the borrower be behind on payments, have tried to obtain a
loan modification but do not qualify, and are able to afford the “market rent”
using less than 31% of the household gross income for rent. These borrow-
ers would voluntarily deed their home to Fannie Mae and sign a lease on the
property for one year. They may be able to continue with the lease on a
month-to-month basis after the first year. Most believe that Freddie Mac will
soon offer a similar program since they already do on an informal basis.
Forbearance: This is a temporary postponement of mortgage payments for a
borrower that encounters a temporary situation where they are unable to make
their payments. Typically, the lender will defer a specific number of payments, add
them to the principal balance, create a short term repayment plan, or even create
a second mortgage which will amortize with the first over the term of the loan.
Programs of this nature are an encouraging sign that banks see recovery or
stabilization in the housing sector. If banks forecast further decline in values,
they will accelerate their options toward foreclosure in an effort to seize the
property and resell the asset before values decline further. When banks feel
values are stable, their preference is to keep the home occupied, off the
market and generating some level of revenue.
What remains to be seen is how banks manage their inventory going for-
ward. If they find a way to work out the option arms, the worst is over. To do
so, they will need to keep the homeowners interested.

2
MARKET TRENDS | BUYER CONSIDERATIONS

TAX CREDITS AND HOME SALES

The graph to the right measures the number of home sold each month in relation-
ship to the median home value in the same time frame. It is likely no coincidence
we see a sharp increase in the number of home sales beginning in February 2009
through today. The graph also demonstrates that values bottomed at the same time
the First Time Buyer Tax Credit was instituted. The tax credit has now been ex-
tended and broadened to include move up buyers.

First time buyers remain eligible for up to an $8,000 credit but the income caps
have been raised to $125,000 for individuals and $225,000 for couples filing jointly.
The credit is also available to those earning slightly more but is phased out over the
next $20,000 in income. Move up buyers are eligible for up to a $6,500 credit so
long as they have owned and occupied a home as their primary residence for five of
the last eight years.

To be eligible for the credit, you must have a binding contract to purchase a prop-
erty before April 30th of 2010 and settle that transaction by the end of June 2010.
Please call me for details if you feel you may be able to benefit from this program.

WEIGHING THE RISK / REWARD

Depending upon your location within our region, prices peaked in our market in the latter part of 2006 or the early portion of 2007. Foreclosures began to set
the new values resulting in a decline that was rather abrupt. As you can see in the graph above, values appear to have stabilized. Foreclosure activity has
slowed as a result of programs designed to provide owners alternatives to short selling or just walking away from their homes.

Obviously the government is providing buyer incentives to encourage demand at the same time they are urging lenders to view foreclosure as a last resort.
As you can see in the graph below, inventory levels continue to decline while sales are trending upward. The combination of these trends has stabilized val-
ues, giving lenders more options to consider with their non-performing borrowers.

This housing cycle is very different from those we’ve experienced in the past. Housing is at the center of the banking crisis and it is probable that no one
really wants to know the true value of the total negative equity in residential property. This is why the “mark to market” accounting standards were relaxed. It
doesn’t seem probable that the government will be willing to allow the recent foreclosure cycle to repeat itself; they will continue to incent lender programs
which keep people in their homes and limit inventory.

It also makes sense that keeping interest rates low will continue to trump concerns over inflation. We will likely see rates rise marginally over the next several
months, but not to a level that takes a substantial number of buyers out of the market. Buyers in more modest price ranges are the most at risk of being left
behind as rates begin to creep up. These are also the price points where we have seen appreciation return in the last twelve months.

Assuming values have stabilized, the most important variable becomes interest rates. The mortgage payment at 5% on a thirty year fixed rate program is
$5.36 per thousand dollars borrowed. For each incremental quarter of a point in interest rate, the payment increases by 16.2 cents. It doesn’t sound like
much, but the difference in the payment for a $100,000 principal balance at six percent rather that five, is $63 per month or $763 per year. With an average
sales price in our regional market over $300,000, that means paying almost $2,300 a year, or $190 a month more for the same purchase price.

If you are weighing a purchase decision, it will pay to take action. The tax credits combined with the likelihood of interest rate hikes are a significant motivator.
That is exactly what they are intended to accomplish.

Regional Summary 2000-Year to Date WHERE WE ARE IN THE CYCLE

14,000 Value quantifies the relationship between supply and demand. When view-
12,000 Active Listings ing the chart to the right, listings and sales followed similar trend lines until
10,000 mid year 2005. Inventory broke out, sales declined which caused values to
Sold Properties
8,000 decrease. Until that time, when inventory and sales were well balanced,
6,000 steady appreciation occurred.
4,000
2,000 The inventory trend is returning to normal historical levels and sales velocity
0 is improving each year. Banks are becoming more comfortable with alterna-
tives to foreclosure because values have stabilized. It will take a few years
00

01

02

03

04

05

06

07

08

09
n-

n-

n-

n-

n-

n-

n-

n-

n-

n-

to clear bank inventory in programs like “Deed for Lease,” but it is in every-
Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

one’s interest, banks included, to keep inventory within a reasonable range.

3
CENTURY 21 NEW MILLENNIUM | REAL ESTATE NEWS

SUMMARY
If you are considering a real estate transaction, thorough analysis and competent representation are
essential. We are in a transitioning market. There is potential for profit, as is there risk of loss. If we
understand the underlying facts, we can continue to make good business decisions logically and
without emotion. I am a real estate professional and accept responsibility for keeping my friends,
neighbors and business community informed as to all aspects of things affecting the real estate por-
tion of their holdings.

If you are currently listed for sale, this is not a solicitation. If you have a real estate question, I will be
happy to answer it, or find the answer. If you have a real estate need, I will appreciate an opportunity
to compete for your business. Our team is very good at what we do...our results demonstrate that. Tony Lopez
Don’t settle for less. Realtor / Consultant

Sincerely,
5990 Kingstowne Towne Center

Tony Alexandria, VA 22315

Office: 703-822-2344

tony.lopez@c21nm.com
Tony Lopez
http://tonylopez.c21nm.com

703-963-3208

5990 Kingstowne Towne Center

Alexandria, VA 22315
www.c21nm.com