Frank Demarais testimony on HPAP



May 28, 2009

Good morning and thank you for opportunity to comment on the serious impact the growing foreclosure problem will have on District Homeownership and Affordable Housing. My name is Frank Demarais, and I am vice president and general manager of Manna Mortgage, the District’s only non-profit mortgage company.

The increasing numbers of foreclosures in the District have already wiped out significant amounts of home value and undercut hard fought growth in financial stability for many current District residents.

This will hurt existing resident’s ability to sell or refinance, and will hurt DC tax revenue. In round numbers, every 1% drop in DC real estate values reduces DC tax revenue by $19 million ( using 2009 $1.9 billion real estate tax budget projection) , so a 5% drop equals almost $100 million.

To understand the scale, recognize that in 2008 only 1,526 homes under $300,000 sold in the District, out of 5,464 total sales. In 2008 saw completed foreclosures top 900 out of 2,800 filings.

Foreclosures at this level are a major driver of sales and valuations.

Foreclosed properties generally sell for well below reasonable market value – below recent sales and at levels where monthly payments are lower than apartment rent.

Examples of two cases Manna Mortgage is working with today

1200 block of Congress St. SE, in Congress Heights, sale price of $139,000 on a 3 bedroom home that appraised for $166,000 and had been on DC tax roles at $219,000.

3100 block of Lyndale Place, SE in Hillcrest neighborhood, sale price of $180,000 on a 3 bedroom house that appraised for $200,000 and had been on DC tax roles at $282,000.

Every house on those blocks, and for many blocks around them, will suffer from these low sales prices – as those sales become ‘comps’ for any sales or refinance.

The foreclosure problem is a supply problem.

The District has a tool in its existing tool kit to help boost demand to address this supply.

  • NO new program needed.

  • NO new money needed.

  • NO new staff needed.

What is needed is District government leadership and promotion of its existing, strong first time home buyer programs – HPAP, EAHP and the DC HFA Bond Program.

These programs are Market Driven – leveraging mortgage money by providing the down payment loans (paid back in the future) that let home buyers access the very low first interest rates and lower sales prices of today’s market.

These programs are fully functioning, fully staffed and fully supported by the mortgage and realty industries. They only need greater communication and confidence in their availability to help plug the foreclosure gap with ready buyers.

These programs support Current District Residents and District Employees become the demand that keeps home values from further wiping out the equity of existing residents. Without these buyers – foreclosures are bought up by Speculators and Slumlords, and we’ve been there.

These programs provide Credit Ready, Income Ready, and Homeownership Educated buyers who have a great track record for successful, long term home ownership. Building communities, building their family stability and supporting the District’s tax base.

Manna strongly encourages the District to help build consumer confidence in home buying by

  1. Implementing an information campaign to celebrate the “American Dream in the District” – immediately expanding its marketing and promotion of the HPAP, EAHP and DC HFA Bond program.

  2. Commit to have no suspensions of HPAP funding during the remainder of the 2009 and into the 2010 budget years. The shutdown of HPAP severely undercut the momentum of the program and let the foreclosure sales driven market build up some steam.

The District desperately needs to expand the use of HPAP, through marketing and promotion of HPAP availability, and needs DHCD to maintain its commitment to putting DC first time buyers into the market to keep foreclosure sales from destroying the fabric of our communities – bringing back speculators and slum lords as the only buyers with the down payment needed to buy.

HPAP funding at the $23.4 Million FY 2009 level was a reduction in total funding, based on FY 2008 actual, and the suspension of the program from November 17, 2008 to January 23, 2009, and continuing funding slow down, dramatically hurt the program activity and marketing. The reduced maximum HPAP loans by household income reduced the ability of the program to provide the previously achievable 20% down payment needed to avoid the Mortgage Insurance costs, and significantly increased the housing expense for even the lowest priced homes. The 2009 HPAP loan amount for a one person household income of $48,000 is $22,000 HPAP loan, down from the $42,500 eligible in 2008 – reducing affordability from a $210,000 property to approximately $180,000 property.

The District needs the FY 2010 budget for HPAP to increase to better support the number of properties that will be sold by banks after foreclosure, or by owners under duress, which will increase significantly in 2009 and 2010. Many of these properties will be affordable to HPAP eligible buyers, and that market needs HPAP in 2010 to increase its availability and funding to maintain its support for approximately one third of all homes sold for prices under $300,000.

The economic crisis is first and foremost a housing and credit crisis. Damage to the housing markets undercuts the economy in significant ways beyond reducing new construction jobs – with reduced home equity value undercutting household spending on home improvements that employ local small business contractors; a multiplier effect of reduced home value and reduced retirement savings value causing families to dramatically cut back spending across the board; and every 5% reduction in real estate value reducing District real estate tax revenue by as much as $100 million a year;

The District is just now beginning to see the impact on its residents, with job losses and foreclosures growing. Foreclosures in 2008 were up dramatically, with over 970 completed foreclosures, dragging down value in every neighborhood in the city. Home values have held up better than in other jurisdictions, but will face continued stress in the next couple years.

The District gets a very big immediate bang, with a big multiplier effect for its investments in housing – investment which are always leveraged by multiples of private investment, investments that have immediate impact because the programs are already up and running and the economic activity happens very quickly; investments that are usually loans paid back in the future to be recycled into new investments; and investments that direct their benefits to current District residents.

HPAP loans represent the critical down payment funds necessary for current District residents to take advantage of the more affordable home prices, and create a floor on home price declines.

HPAP stabilizes neighborhoods in the face of growing foreclosures – putting qualified home buyers into these properties – with the training, the income and the credit stability for successful home ownership. Without the down payment funds, home values keep falling until speculators and slum lords step in for the bargains.

HPAP stabilizes general home values – with 500 HPAP loans representing fully one third of all home sales under $300,000 in 2008. Without HPAP buyers, values would fall significantly and the value of every home in the city, not just those under $300,000, would fall further. HPAP buyers are needed to hold up values – a single foreclosure sale by a bank looking to dump the property can become the comparable sale setting values that restrict other sales and refinances for a half mile radius. Protecting home values protects the greatest source of assets for many District residents – allowing them to spend to improve their homes, spend to improve their lives.

District real estate tax revenue would fall based on lower assessed values, and also take years to recover based on lagging assessment process. If HPAP support keeps District home prices from falling an additional 5% more than they would otherwise, it could save the District almost $100 million a year (against budget projection of $1.9 billion real estate tax revenue).

The HPAP program represents an investment by the District in its residents, its communities and its long term health. The money is invested, to be repaid and recycled in the future. At a time when public policy across the country is doing everything it can to counter the recessionary forces, especially in real estate and financial sectors, there is no better tool in the District’s tool box than supporting the low- and moderate-income residents in supporting the critical real estate sector.

Thank you for the opportunity to share our thoughts and experience.

Frank Demarais, 202-832-1845,

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