The numbers are way down from last fall, but this doesn't indicate that delinquencies have plummeted

600 foreclosure REUTERS Rebecca Cook.jpg

In May, foreclosure activity declined to a level not seen since November 2007. Last month, it fell by 2.0%, according to foreclosure tracker RealtyTrac. Unfortunately, this drop isn't likely tied to far fewer borrowers experiencing trouble paying their bills, but to banks failing to process foreclosures quickly enough to keep up with severe delinquencies.

Here are two charts showing foreclosure activity by type of action, first with lines and then with stacked bars:

foreclosures 2011-05 lines.png

foreclosures 2011-05 bars.png

You can see that only auctions rose in May, while default notices and bank seizures both fell. Default notices have actually fallen to a level not seen since December 2006.

RealtyTrac CEO James J. Saccacio interprets these results:

Foreclosure processing delays continue to mask the true face of the foreclosure situation, although there were some clues in the May numbers of what lies behind that mask. First, activity spiked in May for various stages of the foreclosure process in some states, a pattern that has occurred in several states over the past few months. This pattern provides evidence that lenders are somewhat unevenly pushing batches of bad loans through foreclosure as they overhaul their paperwork and documentation procedures and as they determine that some local markets are able to absorb more foreclosure inventory.

Looking at the top-10 states for highest concentration provides a glimpse of the uneven nature of foreclosure activity at this time:

foreclosures 2011-05 states.png

In some states, month-over-month foreclosure activity rose significantly, like in Georgia and Michigan. But in others it plummeted, like in Idaho and Utah. Foreclosure strategy is clearly taking on a new dimension at banks, as they're choosing to approach the limited number of foreclosures they are able to process based on whatever result is likely to benefit them most.

Despite the decline in foreclosure activity we've seen over the past several months, the problem still remains mostly concentrated in five main states. California, Florida, Michigan, Arizona, and Nevada made up more than half of the foreclosure activity in May.

But for now, measuring foreclosures is not a particularly useful way to understand the health of the housing market. Until foreclosures speed up to match the rate at which Americans are actually defaulting according to their loan terms, we won't know if declining foreclosure activity really indicates improvement or not. Instead, we'll have to continue to monitor demand, shadow inventory, and delinquencies. Let's hope banks and servicers get their act together soon.

Image Credit: REUTERS/Rebecca Cook

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