Foreclosure Activity Falls, but the Worst Isn't Over Yet

Delays in foreclosure proceedings and a new push by big banks and servicers to find foreclosure alternatives is drawing a new, albeit still troubling picture of the nation's real estate market.

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New notices of default, the first step toward foreclosure, fell to a level in May not seen since the end of 2006, according to a new report by online foreclosure site RealtyTrac. Bank repossessions, or REO, the final stage of foreclosure, also fell on a monthly basis for the second straight month. That pushed total foreclosure activity down 33 percent from a year ago.

"I really wish I could say that looking at a 42-month low in foreclosures action means that the housing market is recovering, and the foreclosure problems are all going away and we should all go about our business and be happy," says RealtyTrac's Rick Sharga. "Unfortunately, those would all be lies."

The numbers have been on a roller coaster since the so-called "robo-signing" foreclosure paperwork scandal that unfolded last Fall.  Now there are big discrepancies in the numbers state to state, depending on which states practice judicial foreclosures and which don't.  The foreclosure timeline is also increasing as more banks and loan servicers focus on short selling distressed properties, which is when the sale price is less than the value of the mortgage.

REO activity was down 6 percent overall in non-judicial foreclosure states month-to-month, but some non-judicial foreclosure states posted substantial month-over-month increases.  Bank repossessions jumped 79 percent in Georgia, 36 percent in Virginia, and 19 percent in Michigan.

In judicial states, bank repossessions actually rose 1 percent month to month, as courts finally begin to get new paperwork and work through lawsuits.  In New York, REO activity jumped a whopping 97 percent, and 21 percent in New Jersey.

While the usual suspects, California, Arizona and Nevada still lead the nation in foreclosure activity, the pain is still spreading nationwide.  The sheer volume and share of distressed properties in the current market continues to push home prices to new lows since the worst of the housing crash.  Some states may see higher numbers, but the effect is the same.

"It’s a little bit like saying that aside from that one unfortunate incident with the iceberg, the Titanic had a really wonderful cruise," describes Sharga.  "What we’re talking about are really markets that drive a lot of the real estate market, a lot of the economy. And these are states that have had really severe foreclosures. But beyond that, 72 percent of the top 200 markets saw an increase in year over year foreclosures activity in the last year."