The monthly foreclosure market report, released by RealtyTrac for May 2012, revealed that overall foreclosure activity has been soaring. As per this leading online marketplace of foreclosure properties, foreclosure filings for the reported quarter surged 9% from the prior month, but dipped 4% from the prior-year period. This brought the total number of properties receiving default, auction or repossession notices to 205,990.

In May, foreclosure starts – default notices issued and foreclosure auctions (depending on the state’s foreclosure procedure) – jumped 12% from April 2012 and 16% from May 2011 to 109,051 properties. Foreclosure starts increased in 33 states on an annual basis, including 17 states with judicial foreclosure process and remaining with non-judicial foreclosure process.

Moreover, bank repossessions (REO) grew 7% from the prior month but fell 18% from the prior-year month to 54,844 properties. Further, overall foreclosure activity surged 26% in judicial states, while it declined 20% in non-judicial states.

The increase in foreclosure activitiy indicates that mortgage servicers have resumed distressed property dealings with full force. The primary reason behind this resumption is the $25 billion settlement deal that took place between five mortgage servicers – JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC), Citigroup Inc. (C), Ally Financial Inc. and Wells Fargo & Company (WFC), 49 states’ attorneys general and the regulators in February.

However, with mortgage servicers finding other options – short sale and loan modifications – to prevent foreclosure, we believe that foreclosure activity would take time to show a significant upward trend. When all these alternatives would wear out, only then a property would be foreclosed.

In the first quarter of 2012, there was a 25% rise in the short sale of properties that were at some stage of foreclosure, whereas the sale of bank-owned properties declined 15% on the year-over-year basis. The lenders also support short-sales, which are a quicker way to get back some amount from their mortgages than wait for foreclosures (a more expensive and time-consuming process).

As per the RealtyTrac report, there will be a gradual rise in foreclosure activity for the rest of the year. Also, there will be additional pressure on the home prices as many properties would to come to the market due to the surge in foreclosure activities.

Though the leap in foreclosures may dampen the housing prices in the near-term, this will enable the housing market to revive in the longer term. Moreover, we hope that there would be enough number of buyers for these properties; otherwise the housing market will have a little chance to regain a solid foothold in the market.

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Zacks Investment Research