Flood of Foreclosures Heading to Housing Market

Photo: Jeff Turner

New foreclosure starts rose sharply in August, signaling a slew of foreclosed properties will be dumped on the already bloated housing market in early 2012.

"Notices of Default," the first stage of the foreclosure process, rose 33 percent month-to-month, according to a new report from RealtyTrac.

Much of this was driven by a huge jump in the numbers from Bank of America , as reported here on the blog Tuesday.

“The big increase in new foreclosure actions may be a signal that lenders are starting to push through some of the foreclosures delayed by robo-signing and other documentation problems,” said James Saccacio, chief executive officer of RealtyTrac. “It also foreshadows more bank repossessions in the coming months as these new foreclosures make their way through the process.”

As always, the numbers vary locally, with default notices up more than 40 percent month-over-month in New Jersey (42 percent), Indiana (46 percent) and California (55 percent). The numbers are still down from August of 2010, but that was a near-record high month before any of the "robo-signing" documentation problems were uncovered.

While the jump is significant, it may just be the tip of the iceberg.

After posting my blog on Bank of America Tuesday, a spokesman there responded, "We are on an ongoing path to return foreclosures to normal levels. Strong gains like that from July to August demonstrate our progress – primarily in judicial states — clearing more volume to advance to foreclosure once we pass the numerous quality controls we have in place and exhaust all options with homeowners. Our progress each month builds upon foreclosure levels lower than the market realities would dictate."

The market realities are a far higher number of delinquent loans that have not yet even made it to foreclosure starts. There were 4.38 million delinquent loans recorded in July by Lender Processing Services, which does not include the 2.15 million in the foreclosure process. This latest jump, fed by Bank of America, may push other major loan servicers to do the same.

"I wonder if this will signal a move by the lenders and servicers to stop waiting for the final settlement with the government to take place and re-start foreclosure proceedings on all those seriously delinquent loans?," asks RealtyTrac's Rick Sharga.

While settlement talks, lawsuits and investigations slog on, the big bank servicers are working to get the troubled loans through the process and off their books, and frankly that is the best course of action. The mortgage and housing market crash was a man-made disaster, but just like any hurricane or tornado, you cannot rebuild until you've cleared away the mess.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick