Mortgage Lending Standards will Hurt DC, Maryland, Virginia Housing Markets

A much-anticipated recovery in Greater Washington’s housing market could face its next challenge from tighter mortgage lending restrictions.

With foreclosures on the rise around the U.S., some lenders are starting to toughen their standards when doling out cash for new homes.

The subprime mortgage market, often associated with bad credit home loans provided to consumers with poor credit, is mostly to blame for a 42 percent spike in foreclosures that occurred in 2006, according to research firm RealtyTrac.

Adjustable-rate mortgages with low initial rates and loans with no money down were floated to many buyers who ultimately could not afford the houses they purchased.

More than 1.2 million foreclosures were recorded in 2006, or one for every 92 U.S. households, according to RealtyTrac.

Virginia Commerce Bank deals mostly in “A paper” loans, or mortgages that abide by strict Freddie Mac and Fannie Mae guidelines for buying homes, said Marsha Bradshaw, the bank’s senior vice president of residential mortgage lending.

However, the fallout with subprime loans is having a ripple effect through the entire mortgage market and is changing underwriting requirements almost on a daily basis, she said.

“Six weeks ago, you could get 100 percent financing without income certification if you had a certain credit rating,” Bradshaw said. “That outlet is gone. For the residential market, it will start to reduce the pool of potential buyers.”

The Greater Washington DC housing market tumbled in 2006, but its performance was better than in most areas of the country.

That’s due to the region’s strong economy and job growth, analysts say.

And RealtyTrac’s foreclosure report bears that out. Virginia and the Maryland housing market were near the bottom of the list and placed 41st and 38th, respectively, in the nation for total foreclosures.

Data for D.C. was not available.

Cardinal Bank - which owns the D.C. region’s second-largest mortgage lender, George Mason Mortgage - hasn’t had problems with foreclosures and also deals primarily with A paper home mortgage loans, said Bernard Clineburg, chairman and CEO of Cardinal Bank.

The lender keeps a conservative set of standards and insures itself against first-payment defaults, Clineburg said. He aded that the region’s housing market shouldn’t suffer too much in the near term.

“Even in a foreclosure when people are forced to sell, that’s still a sale,” Clineburg said. “We feel pretty good about our region. I don’t see a crash happening here.”

Still, sales continue to lag compared with this time in 2006. Only D.C. recorded an increase in sales volume in March, a rise of just 0.3 percent. Sales fell by 6 percent and as much as 40 percent in some Greater Washington jurisdictions, according to data compiled by Metropolitan Regional Information Systems.

Median prices did rise by more than 9 percent in D.C. in March, from $397,000 in March 2006 to $434,500 this year. Prices were flat in other local jurisdictions, except Loudoun County, Va., where the median sales price dropped more than 11 percent in March.