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Sharp rise in foreclosures as banks move in

More U.S. homes are entering the foreclosure process, but they're taking ever longer to get sold or repossessed by lenders.
Image: Caitlin Barbiere, 2 1/2, plays in the driveway as her family's possessions sit piled in the front yard during a home foreclosure eviction on October 5, 2011 in Miliken, Colorado
Caitlin Barbiere, aged 2,  plays in the driveway as her family's possessions sit piled in the front yard during a home foreclosure eviction on October 5 in Miliken, Colo.John Moore / Getty Images
/ Source: NBC, and news services

More U.S. homes are entering the foreclosure process, but they're taking ever longer to get sold or repossessed by lenders.

The number of U.S. homes that received a first-time default notice during the July to September quarter increased 14 percent compared to the second quarter of the year, RealtyTrac Inc. said Thursday.

That increase signals banks are moving more aggressively now against borrowers who have fallen behind on their mortgage payments than they have since industrywide foreclosure processing problems emerged last fall. Those problems resulted in a sharp drop in foreclosure activity this year.

The surge in default notices means homeowners who haven't kept up their mortgage payments could now end up on the foreclosure path sooner.

Initial default notices are first step in the process that can eventually lead to a home being taken back by a lender.

A pickup in foreclosure activity also means a potentially faster turnaround for the U.S. housing market. Experts say a revival isn't likely to occur as long as there remains a glut of potential foreclosures hovering over the market.

The third-quarter increase in initial defaults was largely a product of a spike in August. In September, default notices were off 10 percent from August, RealtyTrac said.

Still, the jump in initial defaults during the July to September period is significant because it is the first increase after five consecutive quarterly declines, suggesting banks are gradually addressing their backlog of homes in foreclosure and are now beginning to move on more recent home loan defaults, said RealtyTrac CEO James Saccacio.

"While foreclosure activity in September and the third quarter continued to register well below levels from a year ago, there is evidence that this temporary downward trend is about to change direction, with foreclosure activity slowly beginning to ramp back up," Saccacio said.

Garbage from a foreclosed home sits outside the Bank of America on LaSalle St., during a protest in Chicago, Tuesday, Oct. 11, 2011. (AP Photo/Paul Beaty)Paul Beaty / FR36811 AP

Foreclosure activity began to slow last fall after problems surfaced with the way many lenders were handling foreclosure paperwork, namely shoddy mortgage paperwork comprising several shortcuts known collectively as robo-signing.

Many of the nation's largest banks reacted by temporarily ceasing all foreclosures, re-filing previously filed foreclosure cases and revisiting pending cases to prevent errors.

Other factors have also worked to stall the pace of new foreclosures this year.

Government probes
The process has been held up by court delays in states where judges play a role in the foreclosure process, lenders' reluctance to take back properties amid slowing home sales and a possible settlement of government probes into the industry's mortgage-lending practices.

Those settlement talks, led by a group of state attorneys general, have been undermined in recent weeks after state officials in some states, including California and Massachusetts, have broken with the rest of the states.

While banks appear more willing to start the foreclosure countdown on borrowers, they haven't put a dent in the overall length of the foreclosure process.

In the third quarter, it took an average of 336 days, or 11.2 months, for a U.S. home to go from receiving an initial notice of default to being foreclosed by a lender, RealtyTrac said.

That's up from 318 days, or 10.6 months, in the second quarter and represents the largest average span of time for the foreclosure process since the first quarter of 2007, the firm said.

In all, 195,878 properties received a default notice in the third quarter. Despite the sharp increase from the second quarter, the total was still down 27 percent versus the third quarter last year, RealtyTrac said.

Lenders took back 196,530 homes during the quarter, down 4 percent from the second quarter and down 32 percent from the same quarter last year.

Banks remain on track to repossess some 800,000 homes this year, down from more than 1 million last year, Saccacio said.

RealtyTrac had originally anticipated some 1.2 million homes would be repossessed by lenders this year.  

Meanwhile, a report by an interfaith group in St. Paul, Minn., found that foreclosures had disproportionately affected low income and poor communities in the city, NBC station KARE reported Wednesday.

The group, ISAIAH, found three of St. Paul's low-income neighborhoods saw the biggest drop in housing values in the city over the last five years.

The neighborhoods of Dayton's Bluff and Payne Phalen on the east side, and Thomas Dale — also known as Frogtown — have seen home values drop about 50 percent since 2006. That's almost double the drop in the more affluent Mac-Groveland, Highland and St Anthony Park neighborhoods.

Racial disparitiesThe report was titled "Widening the Gap: How the Housing Crisis Deepened Racial Disparities in St. Paul and How to Fix it."

Kate Hess Pace, ISAIAH organizer, said low-income and minority neighborhoods were more likely to be targeted for risky subprime mortgages and the instances of foreclosure was more severe in these communities.

"It's actually been widening disparities between people of color and whites in terms of how it's impacted neighborhoods, home value, the amount of vacant homes and generational wealth," Pace said.

"We've got vacant houses that are sitting there," Jill Henricksen, director of the Greater Frogtown Community Development Corporation, added. " They are being broken into. Garbage is being dumped. We are seeing an increase in prostitution. We are seeing an increase in theft. All kinds of things around these properties."