Increase in foreclosure activity seen during May

LOS ANGELES - Lenders initiated foreclosure proceedings against more U.S. homeowners in May, setting the stage for increases in home repossessions and short sales - scenarios that could further weigh down home values in coming months.

Default or scheduled-home-auction notices were filed for the first time against 109,051 homes last month. That's an increase of 12 percent from April and up 16 percent versus May last year, foreclosure listing firm RealtyTrac Inc. reported today .

The firm monitors documents filed on properties with mortgages that have gone unpaid. Once that process begins, homes can end up foreclosed-upon, sold at auction or via a short sale. A short sale is when the bank agrees to accept less than what the borrower owes on their mortgage.

May was the first month since January 2010 that the number of homes starting on the foreclosure path rose on an annual basis. But the trend has been visible in the monthly numbers, with four out of the first five months of this year recording increases over the preceding month.

The data reflect how banks and mortgage servicers have been stepping up efforts this year to address unpaid mortgages.

Notably, states that have been foreclosure hotbeds throughout the housing downturn - Nevada, California, and Arizona - each recorded sharp annual declines in home repossessions last month.

One factor: Banks are increasingly opting to resolve foreclosure cases via short sale, rather than completing the foreclosure process by taking back properties.

Foreclosure activity, as measured by the number of homes receiving foreclosure-related notices, slowed sharply last year as banks grappled with allegations that they had been processing foreclosures without verifying documents.

A $25 billion settlement reached in February between the nation's biggest mortgage lenders and state officials has since cleared the way for banks to move against homeowners who have fallen behind on their mortgage payments.

"Lenders are starting to catch up with the delayed foreclosures of the past year and a half," said Daren Blomquist, a vice president at RealtyTrac.

Some 33 states saw annual increases in homes entering the foreclosure process last month, with New Jersey, Pennsylvania and Florida posting the biggest gains.

Many of the homes now entering the foreclosure process could end up repossessed by banks. Going by the past five years, it could be as many as half.

Some 8.7 million U.S. homes entered the foreclosure process between January 2007 and last month, according to RealtyTrac. Out of those, 4.3 million properties ended up foreclosed-upon.

Still, the pace of home repossessions has been easing overall of late, with May being an exception.

Banks took back 54,844 properties last month, up 7 percent from April, the firm said.

That represents the first monthly increase after three consecutive monthly declines. Repossessions were still down 18 percent from May last year, although 17 states saw increases, including North Carolina, Florida and Georgia.

In the first three months of the year, short sales grew 25 percent from a year earlier, hitting a three-year high. In contrast, sales of bank-owned properties declined 15 percent versus the first quarter of last year, according to RealtyTrac.

"The trend we're seeing is actually short sales are becoming the preferred method for many lenders, rather than bank repossession," Blomquist said.

Foreclosure sales can spell trouble for nearby homeowners, who could see the value of their homes erode further as neighboring foreclosures sell. But short sales typically sell at a smaller discount than bank-owned homes, so they have less of a negative impact on home prices.