2010 Set a New Record for Foreclosure Activity

High unemployment helped to drive a new record number of 2.8 million foreclosure filings in 2010, according to foreclosure tracker RealtyTrac. Despite another monthly decline in foreclosure activity in December due to the delays banks have been experiencing since October after being forced to rework their processes, total filings for the year were up nearly 2% compared to 2009's old record. By looking at how states most severely affected by the housing bubble fared, it's pretty clear that the problem last year was more tied to joblessness than to subprime mortgages.

Here's a chart showing annual foreclosure activity by type since 2006:

Auctions rose slightly in 2010, by 2.1%, while default notices fell by 20.1%. But bank repossessions made up for that decline, increasing by 14.4%. Just over one million homes were seized last year; 1.6 million properties went to auction; and nearly 1.2 million default notices were sent.

Surprisingly, some of the usual suspects when it comes to housing market woes, like Nevada, California, Florida, and Arizona, all saw fewer foreclosure filings in 2010 than in 2009. Meanwhile, the big increases occurred in other states like North Carolina, Hawaii, South Carolina, and Washington. Here's a chart showing the states with the largest rises and drops compared to 2009 (for 13 states, RealtyTrac had revised its counting methodology so comparison is not completely accurate):

This chart shows a few things. First, it's staggering to note some of the numbers in the "% of Housing Units" column. In Nevada, nearly one in 10 of all homes received a foreclosure filing. In Arizona and Florida, the portion of homes receiving filings also exceeded 5%.

Second, it's pretty easy to see that subprime mortgages probably weren't the major driver for the overall increase in filings for 2010. This is clear because the states with the biggest housing market problems due to lax underwriting standards, like those just named, all saw their number of filings decline. Instead, states where the housing boom was less significant experienced an increase in foreclosure filings, probably because they had more unemployed residents who simply could no longer afford to make mortgage payments.

In December, overall foreclosure activity declined by 1.8% compared to November as banks continued to grapple with the procedural problems identified last fall. Repossessions rose slightly, but auctions and default notices both declined. Here are two charts showing monthly activity:

Although seizures increased in December, they were still 31.6% lower than when they peaked in September -- prior to the problems at banks. The other two types of foreclosure activity saw smaller, but still sizable, drops over the same period.

Will foreclosures rise further in 2011? At this point, it's hard to tell. Considering that some of the states hit hardest by the housing collapse appear to be experiencing less foreclosure activity, the overall numbers could begin to decline as well. It probably depends mostly on unemployment, however. If millions of jobless Americans facing foreclosure find work this year, then that could push down filings.

But if unemployment remains stubbornly high, then we may see another record this year. Of course, if banks increase foreclosure filings in coming months to make up for the delays in 2010, once their procedural problems are worked out, then that could also bring up this year's total activity. Finally, as home prices continue to decline, after rising throughout much of 2009 and 2010, we could see a resurgence of homeowners who walk away from underwater mortgages.

At this point, all we can only speculate, as there's too much uncertainty clouding the market and strength of the economic recovery. But we can be pretty confident assuming one thing: foreclosure filings will remain elevated this year, even if they do manage to decline a little.