Headwind to Housing Recovery? Foreclosures Flare-Up Again

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Banks are repossessing fewer homes, in fact the fewest since March of 2007, but in some states that may be about to change, according to a new report from RealtyTrac, an online foreclosure data and sale firm.

Bank repossessions, the final stage of the foreclosure process are down 29 percent from a year ago, but foreclosure starts, which are the first stage of the process, jumped 10 percent in February from the previous month. This after falling for three consecutive months.

"At a high level the U.S. foreclosure inferno has been effectively contained and should be reduced to a slow burn in the next two years," said Daren Blomquist, vice president at RealtyTrac. "But dangerous foreclosure flare-ups are still popping up in states where foreclosures have been delayed by a lengthy court process or by new legislation making it more difficult to foreclose outside of the court system. Foreclosure starts have been steadily building in those states over the last several months and likely will end up as bank repossessions or short sales later this year."

(Read More: Home Buyers Are Back, but Where Are the Houses?)

In hard hit Nevada, where a new state law criminalizing faulty foreclosures went into effect last year, foreclosures basically ground to a halt. In February, however, they hit a 17-month high, up 334 percent from a year ago, according to RealtyTrac, which means banks will inevitably repossess thousands more properties in the near future.

This as home builders in Las Vegas are ramping up construction, due to historically low supplies of homes for sale. That supply is about to change.

(Read More: Here's What Is Fueling the Housing Boom in Vegas)

The jump in new foreclosures is not just in the formerly hardest hit states either. Foreclosure starts jumped 319 percent in Maryland from a year ago, 172 percent in Washington, 139 percent in New York, and 70 percent in New Jersey. All of these states have large backlogs of delinquent mortgages due to new state laws governing foreclosures and/or the fact that they require a judge in the process.

"The strongest correlation we see is that states with the biggest jumps in foreclosure starts are states with some of the most pro-active foreclosure prevention legislation over the past few years. We believe that resulted in a short-term drop in foreclosure activity but is now resulting in a backlash of delayed foreclosures," says Blomquist.

In California, foreclosures slowed dramatically last year due to a new law designed to protect homeowners, the California Homeowner Bill of Rights, and due to the $25 billion National Mortgage Settlement with mortgage servicers over so-called "robo-signing" foreclosure paperwork fraud. In February, new foreclosure starts jumped 41 percent, the first gain since July of 2012.

While the percentage jump is large, in a twist, some argue the foreclosure delays still persist and are hurting the recovery.

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"While policy makers state that the purpose of government intervention is to help homeowners by delaying foreclosures, instead they have created an artificial shortage in bank-owned inventory (REO). The combination of the decline in REO inventory and lack of motivated sellers has left the California real estate market with an acute lack of inventory, which is putting upward pressure on prices," say analysts at ForeclosureRadar.

(Read More: REO: CNBC Explains)

While price gains help recovery, if they happen too fast, they price would-be buyers and investors out of the market, which slows sales again. Price recovery has many believing that housing is suddenly not just back on its feet again, but surging ahead—much of the price recovery is based on lack of inventory of homes for sale, which in turn is due to foreclosure delays, which as we now see, can turn very quickly.

—By CNBC's Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

Questions? Comments? RealtyCheck@cnbc.com