Sammamish Councilmember John Curley lives in a comfortable neighborhood, on a quiet street of 13 homes in a city which draws a sizable amount of income from property taxes. So it came as something of a shock to him when two of his neighbors’ properties went into foreclosure.

“I know my neighbors,” he said. “It pained them terribly — I feel bad for them.”

Sammamish and Issaquah may be two of the wealthiest communities in the state, but the city is not immune to the foreclosure trend affecting the nation. While not nearly as severe as other cities and states in the nation (Washington state is presently ranked 28th in the ratio of foreclosures per homeowner), the problem of commercial and residential foreclosures continues to grow – affecting the financial vitality and security of families, businesses and communities.

According to local realtors, those facing foreclosure span virtually all income levels. A medical doctor midway through her career; a customer relations professional; a nurse in her mid 40s; a tech-industry software engineer.

Local foreclosures are up. More homeowners in Issaquah and Sammamish entered into the foreclosure process from August 2009 to January 2010 than in the previous six months, according to RealtyTrac, an Irvine, Calif.-based company that keeps track of foreclosures.

For all of 2009, 145 homes in Issaquah and 92 homes in Sammamish have either been repossessed by banks or listed by lenders as entering foreclosure.

The foreclosures of two of Curley’s neighbors – one simply turned in the keys to the bank and walked away – caused him to reflect on his own home and the loss of value thanks to a soured real estate market. Median home values in Sammamish have dropped nearly seven and a half percent last year to an estimated $519,255. In Issaquah, median home values also dropped – 6.4 percent to $430,056.

“There used to be a sense that morally, you just don’t walk away,” Curley said. “It must be a horrible feeling to get behind on their mortgage.”

State Attorney General Rob McKenna believes the worst is yet to come.

In an initiative from his state office announced this month, he earmarked more than $1.8 million for local foreclosure prevention programs and cash for directly impacted consumers.

“Sammamish experienced a big run up in home prices. Now they’ve got to come down,” he said. “There could be high levels of foreclosures in this area. We’re bracing ourselves for a second wave of adjustable rate mortages (ARMs) resetting.”

The ARM mortgages, which offer low ‘teaser’ interest rates, only to increase monthly payments later, have forced large numbers of borrowers into foreclosure and bankruptcy. More and more of those homeowners have been caught out by receding home values in the depressed housing market, with homeowners finding themselves “underwater”, or owing more on their mortgage than the estimated value of their home.

Combined with an unexpected event, such as losing a job or an unexpected medical bill, could be the reason those underwater mortgages are turning into foreclosures.

McKenna, who The Reporter spoke with in Sammamish earlier this month, said he wanted to use the $1.8 million to provide funding for a legal services program, and to help residents stay in their homes.

“It’s not any one group (of residents),” said Bonnie Bedall, a Managing Broker with RE/MAX Metro Realty in Seattle, noting in her experience that income wasn’t the primary driver of foreclosures. “The thing to note is it’s pretty area-specific.”

Besides being a Managing Broker with RE/MAX, Bedall is also a “Certified Distressed Property Expert” – a new designation for brokers trained in handling foreclosures and “short-sales”, a transaction that involves getting approval for a sale that is worth less than the seller’s mortgage. An estimated 15 to 20 percent of homes for sale in Sammamish are foreclosure or short sale properties, especially condominiums. Currently, nine condominiums in Sammamish and 31 in Issaquah are listed as short sales.

“In this area, the self-employed tend to be harder hit in this situation,” she said. “They’re seeing a reduction in their business, along with small business owners.”

It is not just local real estate agents and banks that are anxiously following the worsening numbers. City of Sammamish Finance Director Lyman Howard said the high foreclosure rate came to light during the city’s budget planning process, with a steep decline in Residential Estate Excise Taxes (REET), collected every time a home is purchased.

In addition to a fall in market activity and decline in home values (causing a drop in tax revenue), he said the city doesn’t collect money when homes are foreclosed to banks. Then there’s delays in property and utility taxes, which forces the city to place a lien against a property, which could take years to repay.

But, Howard said, city revenues lost to foreclosure pale in comparison to declines due to the weak housing market.

“We’re deferring city projects,” he said. “We’re continuning to collect money, but we’ve pushed out larger projects.”

In 2006, City of Sammamish reported $4,557,660 in REET revenues. In 2009, it was $1,826,525.

In comparison, the City of Issaquah Administrator Leon Kos said the city didn’t track foreclosures, and appeared to be on target for expected property tax and utility revenues. He said many of the foreclosures in Issaquah last year were likely outside of the city limits, and having limited effect on the city budget.

“The effect of foreclosures is within the deviation from what we expect,” he said. “(Property taxes) came in pretty much as anticipated.”

Kos said the only major foreclosure to come to the city’s attention was the foreclosure of the Park Pointe property, a planned development of 250-350 homes.

The original version of this story quoted City of Issaquah Finance Director Jim Blake in the final paragraphs. It was not Mr. Blake who spoke with The Reporter, but City Administrator Leon Kos. The Reporter apologizes for this error.