LOS ANGELES — More homes started on the path to foreclosure in July, even as lenders pulled back on home repossessions.
The number of homes that received an initial notice of default — first step in the foreclosure process — was 6 percent higher in July than last year, foreclosure listing firm RealtyTrac said Thursday. Filings of initial default notices have increased on an annual basis three months in a row.
The trend comes as banks work to make up for time lost last year as the mortgage-lending industry grappled with allegations that it had processed foreclosures without verifying documents.
The increase in homes entering the process raises the possibility that more properties could end up being foreclosed in coming months.
But, of late, banks have been dialing back home repossessions and increasingly letting borrowers sell homes in a short sale, or when the bank agrees to accept less than the seller owes on the mortgage.
Banks took back 21 percent fewer homes last month than in July last year, RealtyTrac said. Repossessions were down 1 percent from June. They’ve been down on an annual basis every month going back nearly two years.
“Lenders are much less likely now than they were even a year ago or two years ago to repossess a property after they’ve started the foreclosure process,” said Daren Blomquist, a vice president at RealtyTrac.
Completing the foreclosure process can potentially open banks to liability if they’re accused of improper procedures. And short sales, on average, sell for $25,000 more than a bank-owned property, Blomquist said.
As a result, lenders are much more likely to look for alternatives, such as a short sale, a loan modification or refinancing.
So far this year, home repossessions have averaged about 57,000 a month. That puts the nation on track for just under 700,000 completed foreclosures this year, below the 800,000 recorded in 2011.
The latest crop of homes entering the foreclosure process does not signal that there is a fresh wave of homeowners in distress and missing payments. The majority of the loans entering foreclosure are mortgages that date back to the housing bubble years, Blomquist said.
On average, 104,000 homes have entered the foreclosure process each month going back to May. That’s well below the 178,000 per-month average in 2009, the year with the highest monthly average, RealtyTrac said.
Even so, the increase in foreclosure-starts could boost the number of homes that end up on the market at a sharp discount to other properties. That means, barring another outcome, many of the homes that entered the foreclosure pipeline in recent months could end up weighing down the values of nearby homes when they hit the market.
A stronger housing market could mitigate the impact of future foreclosures on home prices, and home sales are expected to end up ahead of last year. But many economists still say the market is years away from a full recovery.
The number of homes receiving foreclosure-related notices last month increased generally in states where the courts play a role in the foreclosure process. Among them: New Jersey, Florida, Ohio and Illinois.
Many homes on the foreclosure path were left in limbo in those states last year, while mortgage lenders sorted out the foreclosure abuse allegations.
In contrast, foreclosure activity was down sharply in Arizona and California, foreclosure hotbeds throughout the housing downturn but states where the court does not factor into the foreclosure process.
That didn’t keep California from posting the nation’s highest foreclosure rate last month. One in every 325 households reported a foreclosure-related notice in July, more than twice the national average.