Foreclosure Filings in Downtrend. Masked Reality?

Could the end be near? There finally appears to be a developing trend of good news on the foreclosure front as filings of all types declined by two percent in May. This is now the eighth straight month that RealtyTrac's U.S. Foreclosure Market Report has shown a month-over-month drop and May filings were 33 percent lower vs. May 2010.

Of course, the foreclosures that have caused such disruption to the market and heartbreak for millions of Americans are still occurring at levels that were never imagined five years ago, and in May one in every 605 U.S. housing units received a filing. Still, the data has been pointing for some months to fewer loans defaulting and what we hopefully are seeing now is the huge backlog of seriously delinquent loans working their way through the system.

The May report shows that 214,927 properties in the U.S. received some type of foreclosure filing last month compared to 219,258 in April which was itself down 9 percent from March. RealtyTrac, an Irvine California firm tracks foreclosure filings in three categories:

1. Notice of Default (NOD) and Lis Pendens (LIS). This is the first legal notification from a lender that the borrower on a mortgage loan has defaulted under the terms of their mortgage and the lender intends to foreclose unless the loan is brought current.
2. Auction - Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS): if the borrower does not catch up on their payments the lender will file a notice of sale (the lender intends to sell the property). This notice is published in local paper and contains information pertaining to the date, time and subject property address.
3. Real Estate Owned or REO properties : "REO" stands for "real estate owned" and typically refers to the inventory of real estate that banks and mortgage companies have foreclosed on and subsequently purchased through the foreclosure auction if there was no offer higher than the minimum bid.

Notice of Default filings (NOD, LIS) totaled 58,797 in May, a seven percent decrease from April and down 39 percent from a year earlier. This was the lowest number of default notices recorded in a single month since December 2006.

Foreclosures were scheduled (NTS, NFS) for the first time on 89,251 housing units. This was an increase of 3 percent over April figures following eight straight months of decreases. The May 2011 figure was 33 percent lower than the number of foreclosures scheduled a year earlier.

Lenders repossessed 66,879 properties during the month, a 4 percent decrease from April and the second straight month the number was down. Repossessions (REO) were 29 percent lower than one year earlier. RealtyTrac noted that, since the so-called robo-signing controversy erupted last fall, REO activity has exhibited a rollercoaster pattern with five monthly decreases and three increases.

"Foreclosure processing delays continue to mask the true face of the foreclosure situation, although there were some clues in the May numbers of what lies behind that mask," said James J. Saccacio, chief executive officer of RealtyTrac. "First, activity spiked in May for various stages of the foreclosure process in some states, a pattern that has occurred in several states over the past few months. This pattern provides evidence that lenders are somewhat unevenly pushing batches of bad loans through foreclosure as they overhaul their paperwork and documentation procedures and as they determine that some local markets are able to absorb more foreclosure inventory.

"Second, while the inventory of properties in the foreclosure process has declined steadily over the past six months - thanks in large part to 16 consecutive months of year-over-year declines in new default notices - the inventory of unsold bank-owned REOs increased in April and May even as new REO activity slowed in both of those months," Saccacio continued. "That points to continued weak demand from buyers, making it tough for lenders to unload their REO inventory. Even at a significantly lower level than a year ago, the new supply of REOs exceeds the amount being sold each month."

A total of 141,348 properties received foreclosure filings in states where lenders primarily use the non-judicial foreclosure process, nearly two-thirds of the national total. Overall foreclosure activity in non-judicial foreclosure states was down 3 percent from April and down 25 percent from May 2010. In non-judicial foreclosure states scheduled auctions increased 2 percent but in California this category was up 16 percent since April and in Texas, Virginia, and Michigan the increase was 10 percent. REO activity in states that used primarily the judicial foreclosure process was virtually unchanged while there was a very high increase in activity in three non-judicial states. In Georgia REO activity increased 79 percent month-over-month while in Virginia and Michigan the increases were 36 percent and 19 percent respectively. There were also spikes in REO activity in four judicial states with New York posting a 97 percent increase, New Jersey 21 percent, Wisconsin 20 percent and Indiana 18 percent.