[Butch Hicks is an appraisal veteran that hails from Northern Virginia](http://www.bhicks.com/). I first met him when he was the President of [RAC (Relocation Appraisers & Consultants)](http://www.rac.net) and was struck by how he got straight to the point, and peppered it with a southern drawl. He is a leader in the appraisal industry and has an affinity for crunching housing market data like I do. In this post for his Hicks on Sticks column in Soapbox, Butch recaps the appraisal world for the year just completed.
…Jonathan Miller

As the end of the year draws nigh, I find myself (as I always do at this time of year) reflecting on things that have impacted (or might) that little world that I find myself in (the residential realty market of Northern Virginia) on a daily basis (like all self-employed folks, I never really escape thoughts of my ‘work’ life). As I reflect back on the year that was 2006, a few topics, likely to impact 2007, spring to the front of my mind.

Real Estate Bubble

The bursting of the real estate bubble, long predicted in some quarters, must have turned into a slow leak in many markets as there simply is little in the way of press attention to that subject. But an attempt to convince folks in my local market (Northern Virginia) that the bubble never burst would probably fall on deaf ears. Since the late spring of 2005 values in some submarkets have fallen almost 30%, not an insignificant number. Admittedly, I’m not sure that what ‘number’ would constitute a burst bubble and I can’t recall ever having seen one defined in all the 2005 press clippings I reviewed regarding such, but 30% is not an insignificant one. In many local submarkets, anyone who bought in 2005 with a high loan to balance ratio is now ‘upside down’ (a term used to describe those situations in which current value is exceeded by the existing mortgage balance). Perhaps your market just lost a little air and the burst bubble was just a slow fizz; but as in politics, I suppose, all is local.

The Coming Impact of Risky Mortgages

The Center for Responsible Lending (a nonprofit group that opposes predatory lending) in Durham, NC recently released a report that indicated the Washington region is likely to be hit hard by increasing foreclosure rates of homeowners with high-interest mortgages. Even the National Association of Realtors chimed in with a supporting opinion, when Pat Vredevoogd Combs, president of that organization, said that “Far too many families are at risk of losing their homes to foreclosure.”

In recent years, high-rate lending has grown rapidly, and this type of lending has been credited, in some quarters, with helping to boost homeownership levels to near record levels. In 1999, about 5% of mortgage loans were described as high-interest but by the end of 2006 that number had quadrupled to about 20% (one of five). Analyzing about six million subprime mortgages made from 1998-2004, the Center for Responsible Lending concluded that should the real estate market remain weak, foreclosure rates in Northern Virginia could more than double for loans made in 2006.

The Center for Responsible Lending report came on the heels of a quarterly study released by the Mortgage Bankers Association, which found that about 948,000 households with high-cost loans were either behind in their payments or were already at some point in the foreclosure process. Officials at that trade group however indicated that the center’s report was overly negative because many of those homeowners in trouble would be able to refinance or sell their homes.

But, speaking locally, can they? I’ve had several discussions recently with various Northern Virginia agents that present a far more likely scenario. Each of these agents was working with a client facing several hard choices. Their client (seller, or potential seller) had purchased a property late in the sellers market of 2000-2004 and as such had paid top dollar for their home. These homes were financed with a high loan to balance ratio mortgage (interest only or adjustable with low teaser rate) that came with a three year bump that is now coming due. The homeowner cannot afford the expected rise in monthly payments (more than 50% in each case) and is unable to sell the property for more than the current loan balance. It doesn’t take one very long to figure out the most likely scenario for homeowners in this position.

A Warning to Mortgage Lenders

In late September, federal banking regulators issued an advisory to the lenders they supervise, telling them that they should not make non-traditional mortgage loans to borrowers who may be unable to repay them (I suppose making traditional loans to such borrowers is okay???). Almost immediately, six states had issued similar warnings to their own lenders, a number that had grown to 19 and the District of Columbia by year end. In Virginia, Edward Joseph Face, commissioner of financial institutions, was hopeful that the state corporation commission would decide on it’s version of a warning. “I don’t think we’ve ever seen this many adjustable interest-only loans on the books in all of historyI am concernedThere are so many out there and when the rates start adjusting, it’s not clear that borrowers will have prepared themselves” Face reported.

Personally, I believe it’s all too clear.