A five-year boom in sub-prime and high interest mortgage lending in Fairfax County is coming around to bite the regional economy on the backside as the housing market flattens, and that could spell real woe.

Such is the analysis tied to a report issued this week from the Washington, D.C.-based Urban Institute, a non-profit economic and social policy research organization.

“This is a serious problem,” Peter Tatian, a senior research associate at the institute, told the News-Press in an exclusive interview yesterday.

Tatian noted that there has been a 300% increase in the annual percentage of risky mortgage loans in Fairfax County between 2001 and 2005. His institute, he said, has mapped the number of total loans issued by companies in the Washington, D.C., area, such as the troubled New Century Mortgage, that specialize in providing mortgages to “sub-prime” clients, those with less than optimum credit.

It also tracked high-interest-rate mortgages, defined by them as three or more points above the U.S. Treasury’s prime rate. Many of those are also sub-prime.

The issue gained national attention last week with roller-coaster activity on the U.S. Stock Exchange associated with the financial woes of New Century, a major sub-prime mortgage lender.

Although not experiencing the highest growth rate of sub-prime lending in the region (Prince Georges County, Maryland is the highest by far), Fairfax County saw a tripling in its rate of such mortgages from 3.7% of the total 2001 to 11.1% of all mortgages by 2005.

In terms of high-interest-rate mortgages, the percentage of the total for the county has grown to 15.9%.

Tatian cautioned to note that the definition of a high-interest-rate mortgage applies only to the rate at the point of purchase. It did not explore the impact of adjustable rate mortgages that experience a rapid rise, often called a “balloon,” after a couple years of a lower, what he called a “teaser,” rate.

Other analysts have warned of the dangerous cycle precipitated by a slow-down in the housing market, especially for minority and lower-income borrowers who are the more likely holders of sub-prime and high interest mortgages.

In the case of Northern Virginia, the slowdown has already resulted in a dramatic drop in construction work opportunities, which has placed financial pressure on the households of such lower income families.

This fact, combined with the onset of adjustable-rate balloons and the inability of the lender to refinance at a lower rate, leads to a rise in defaults and foreclosures.

This, in turn, adds to the housing glut, slowing construction and lowering prices even faster.

The cycle begins to spill over into the wider economy not only in terms of lower home values and taxable assessed real estate values, pressuring the public sector to scale back, but in terms of a diminished buying power among those who can hold onto their homes only by draining their resources to dedicate almost their entire incomes to the monthly mortgage payments.

The environment also leads to rise in scams, in the form of offers of special help in individual crises, amongst vulnerable populations. This “equity stripping” becomes a real issue in such times, Tatian noted.

Tatian stopped short of saying he was predicting “doom,” but he did stress the way in which this process would impact more severely on racial minority and lower-income populations, and said the overall trend represents “a big problem.”