There are two ways to look at the current state of foreclosures. On one hand, activity spiked between April and May, but is down on a year-over-year basis.
In its monthly report, foreclosure marketing firm RealtyTrac says foreclosure filings - default notices, scheduled auctions and bank repossessions - were reported on 205,990 U.S. properties in May.
That's an increase of nine percent from April but when compared to May 2011, it's down four percent. It means the forecast surge in foreclosures, now that the multi-state settlement with mortgage lenders has been ratified, has yet to materialize.
"U.S. foreclosure activity has now decreased on a year-over-basis for 20 straight months including May, but the jump in May foreclosure starts shows that it's going to be a bumpy ride down to the bottom of this foreclosure cycle," said Brandon Moore, CEO of RealtyTrac.
Going foreward, Moore thinks we could see fewer foreclosures and more short sales. In a short sale, the homeowner is allowed to sell for less than the current mortgage balance, meaning the mortgage holder loses money.
Mortgage servicers have been reluctant to do short sales in the past, but Moore says there has been a definite change in their thinking.
"Disposing of distressed homes by pre-foreclosure sale can also benefit lenders and servicers because pre-foreclosure homes sell at a higher average price point than bank-owned homes," Moore said. "Our first quarter foreclosure sales report showed that the average price of a pre-foreclosure home was more than $27,000 higher than the average price of a bank-owned home - which quickly adds up given that there have been an average of 1.6 million nationwide foreclosure starts per year for the past five years.
In essence, banks have finally recognized that treating the problem of delinquent mortgages with short sales rather than bank repossessions can help them minimize their losses and also avoid taking on more REOs, which they then have to manage, maintain and market for sale.
If this trend actually holds up, it could be encouraging news for the housing market. Homes will sell for slightly more than they would have otherwise and avoid going to foreclosure, which often depresses the value of surrounding homes.