Foreclosure sales in non-judicial states dropped 2.0 percent, and those in judicial states remained basically flat, down just 0.01 percent over the month. Even those states that saw increases in foreclosure sales saw only incremental increases in terms of real numbers, and all were still far below pre-moratoria levels.

As reported in LPS’ First Look release, other key results from LPS’ latest Mortgage Monitor report include:

Total U.S. loan delinquency rate: 7.12 % Month-over-month change in delinquency rate: 0.4 % Total U.S. foreclosure pre-sale inventory rate: 4.14 % Month-over-month change in foreclosure pre-sale inventory rate: 0.0 % States with highest percentage of non-current* loans: FL, MS, NJ, NV, IL States with the lowest percentage of non-current* loans: MT, AK, SD, WY, ND *Non-current totals combine foreclosures and delinquencies as a percent of active loans in that state.

 The south, which includes troubled foreclosure states like Florida and Georgia, also saw a sizeable drop in pending sales of nearly 7%. Florida has plenty of foreclosures in process, but few are making it to the market, as Florida requires a judge in the process, and judicial state timelines are still far longer than non-judicial states.

“Aside from the inescapable month-to-month variability, the increasing problem is on the shortage of inventory,” admits Lawrence Yun, chief economist for the NAR. “Areas like Phoenix and Vegas, Orange Country, California are all reporting sharp reductions in inventory, and this is a problem because this is reducing the business transaction potential. So the demand is there, but if someone blinks they’re losing out on the contract signing.”  Why is inventory so low? Because banks are trying to modify more loans as part of the recent $25 billion mortgage servicing settlement. States that require a judge in the foreclosure process are also taking far longer to get the properties out to the market. Approximately 1.4 million homes are currently in the foreclosure process, according to a report today from CoreLogic, with far more loans in some stage of delinquency.

Many of these properties will inevitably reach the sales market, probably in Q3 and Q4, and that will in turn boost low-end sales again, but that in turn could push slowly recovering home prices lower again

Lenders may be favoring short sales versus waiting for troubled loans to go through the foreclosure process to take back the homes securing the loan, said Daren Blomquist, a vice president at RealtyTrac.  “A short sale is a safer alternative to avoid any potential problems that they face because of the way they’re processing foreclosures,” Blomquist said.

All told, 233,299 bank-owned homes or those in some stage of foreclosure sold in the first quarter, making up 26% of all US home sales in the same period, the firm said.  That’s the highest percentage of overall sales since hitting 28% in the third quarter of 2010, before the foreclosure abuse claims against mortgage lenders surfaced.  Foreclosure sales made up 22% of all sales in the last three months of 2011 and a quarter in the first quarter a year ago.  As of end of April, there were 637,668 bank-owned homes yet to be sold, representing a 17-month supply, Blomquist said. Another 722,467 were in some stage of the foreclosure process. 

Sales of all previously occupied homes jumped in January to the highest pace in nearly two years, but declined slightly the next two months. Sales rose 3.4% in April from March to a seasonally adjusted annual rate of 4.62 million, according to the National Association of Realtors. That nearly matched January’s pace of 4.63 million, but was below the nearly 6 million that most economists equate with healthy markets.  Combined, bank-owned homes and those still in the foreclosure process sold for an average of $161,214 in the first quarter. That’s down 1% from the fourth quarter of last year and down 2% from the first quarter of 2011.  Compared to non-foreclosure homes, the average price of a foreclosure sale was 27% below the average sales price of homes not in foreclosure or bank-owned during the quarter. That discount is unchanged from the fourth quarter last year, but is down from a discount of 29% in the first quarter of 2011.

“Nationally the inventory of homes in foreclosure decreased 0.1% from what it was a year ago at this time, and has leveled off over the first four months of 2012.”

Highlights as of April 2012:

-  The five states with the highest number of completed foreclosures for the 12 months ending in April 2012 were:

California (142,000), Florida (92,000), Michigan (60,000), Texas (58,000) and Georgia (57,000). These five states account for 48.8% of all completed foreclosures nationally.

-  The five states with the lowest number of completed foreclosures for the 12 months ending in April 2012 were: South Dakota (62), District of Columbia (162), North Dakota (541), West Virginia (598) and Hawaii (601).

 -  The five states with the highest foreclosure inventory as a percentage of all mortgaged homes were: Florida (12.0%), New Jersey (6.7%), Illinois (5.3%), Nevada (5.0%) and New York (5.0%).

 -  The five states with the lowest foreclosure inventory were:

Wyoming (0.7%), Alaska (0.8%), North Dakota (0.9%), Nebraska (1.0%) and South Dakota (1.4%).

‘FHA delinquencies are getting worse, and we attribute that mainly to the age of book. Loans tend to default in the first 3-4 years that they are out. Because so many of these FHA loans are fairly new, made since 2010, with the big run-up in FHA originations, 2009 – 2010, these loans now are running at their peak default period, which makes the FHA defaults look really high,’ says Jay Brinkmann, chief economist at the Mortgage Bankers Association. But Brinkmann says loan quality is improving by origination year, and he claims more recent years will offset the bad years.

Still, the sheer volume of FHA loans originated during the worst of the housing crash could play against that hypothesis. When credit dried up in 2008, volume at the FHA soared, even as home prices plummeted. Given the low down payment structure at FHA, that inevitably put a significant share of FHA borrowers underwater very quickly, that is, owing more on their mortgages than their homes are worth. Of the 11 million underwater mortgages in the US today, 1.7 million are FHA-insured, according to CoreLogic. Underwater borrowers are more prone to delinquency.

 High loan losses have put the FHA in a precarious position financially. By law, it is supposed to maintain a 2% capital ratio, or assets against risks, but its most recent measure put that ratio at .24%. That is why the FHA is changing the way it serves the current mortgage market. It is now serving higher income borrowers to subsidize its mounting losses, according to a new report from George Washington University, which accuses the FHA of ‘mission creep.’ In fiscal year 2011, 54% of FHA’s activity insured homes whose values were greater than 125% of their area’s median home price, according to the report. In high-cost markets, like Westchester, NY, 63% of FHA borrowers had incomes greater than 150% of the average median income.  ‘Partly in an effort to redeem its mounting and highly publicized delinquencies, it has expanded to a market – higher income borrowers – that it has not traditionally served,’ notes the reports co-author, Robert Van Order, professor of finance at GW.

While the loan limit at Fannie Mae, Freddie Mac and the FHA was raised to a maximum $729,750 during the worst of the crash, they were all lowered to $625,500 in the fall of last year. Barely two months later, Congress reinstated FHA’s higher limit. ‘A rationale for the change was that it might help replenish FHA’s capital by increasing the volume of business,’ according to the GW report.  FHA Acting Commissioner Carol Galante responded to the GW findings at the request of CNBC:  ‘The growth of borrowers with higher credit scores in FHA’s portfolio is really about the broader constriction of credit. Because the private market has been so reluctant to lend — and combined with loan limits set by Congress that exceed those of the GSEs — FHA is still playing a critical, countercyclical role.  However, while we have not actively sought to expand our share of higher credit score business, we absolutely agree that as the economy recovers and the market normalizes, FHA’s role should recede and its portfolio once again be focused on the underserved families FHA was created to serve.’

This spring, FHA raised its upfront insurance premium to 1.75% of the loan from .75% for most loans and its annual premium by 0.10 of a percentage point for loans under $625,000. The increase was expected to bring in $125 billion through September 2013. The average FICO score for new loans is now 700, despite the minimum 580 allowed, but the lower down payments are still a problem.

‘While the FHA may well be serving more higher-income borrowers now, that group is still less well-heeled than the group accessing Fannie/Freddie mortgages or portfolio loans at banks,’ notes Guy Cecala of Inside Mortgage Finance, which in a recent survey found more than half of all first time home buyers using FHA loans. ‘If you combine FHA’s lower credit score with very high loan-to-value ratios, it’s not much of a surprise that FHA would have more problem loans and be more vulnerable to unemployment and other economic issues.’  FHA’s higher income borrowers are a relatively recent phenomenon, while its troubled book of business dates back more than five years. FHA officials claim its new business will offset losses from the old book, but with the economy and jobs market still in shaky recovery, the older loans will still take their toll.  ‘That’s going to be a drag on the agency’s performance for the foreseeable future,’ adds Cecala.”

“As home values slowly increase and these homeowners continue to pay down their principal, they will surface again,” Humphries said in a news release.  But Zillow’s measure is considerably higher — and subsequently more dire — than another report on negative equity among homeowners. A CoreLogic study from the fourth quarter 2011, the most recent available, tabulated roughly 11 million underwater homeowners, or 23% of all mortgaged properties.  Zillow said it analyzes available outstanding mortgage debt data, including lines of credit and first and second mortgages, provided by credit agency TransUnion. CoreLogic uses its own database of mortgages, which the company says accounts for roughly 85% of mortgages in the US.

Cynthia Nowak, a Zillow spokeswoman, said the company’s survey covers an estimated 50 million out of roughly 53 million mortgaged homes.  The differing numbers of underwater homeowners might have to do with the general problems of covering such a huge market, said Bill Emmons, an economist at the Federal Reserve Bank of St. Louis. There’s no absolute way to measure outstanding mortgage debt, he said, but the bigger difference likely comes from how each outlet measures home values.  “Even if you do come up with estimates for individual house values, it’s almost always assuming orderly market conditions,”

Emmons said. “There is no answer or no solution to assigning values to something that hasn’t sold yet.”  The real issue, Emmons said, is that the different measures haven’t changed much. Zillow’s first-quarter reading fell just one percentage point from a year earlier, while CoreLogic’s fourth-quarter numbers came in at the same level as third-quarter 2009.  This negative equity and loads of debt present problems for the economy and skittish lenders, Emmons said. But for homeowners, the bigger harm is that negative equity raises the probability that other factors, like unemployment, could lead to default.

“It’s sort of like your immune system being compromised,” Emmons said. “You’re just more vulnerable to anything coming along.”

 Even for a current borrower, negative equity makes it harder to move and to refinance their mortgage, said Fred Furlong, an economist at the Federal Reserve Bank of San Francisco.  But all households, even those from states that didn’t see huge price drops, have cut back on nonmortgage debt on similar levels, Furlong said. It’s as if “there has been a broader lesson” from the housing boom and bust, he said.

Zillow’s report is especially bleak for metropolitan areas in states hit hard by the housing crisis. Las Vegas led the country’s biggest cities with 71% of mortgaged homeowners underwater in the first quarter, followed by Phoenix at 55.5% and Atlanta at 55.2%.  Pittsburgh marked the low among big cities at 16.7%, trailed by New York at 21.3% and Boston at 22%.

 The second phenomenon is more disturbing, and it’s happening in some of the hottest foreclosure markets, like Phoenix, Arizona. Investors are flocking there, as we’ve reported widely on CNBC, and that is creating huge competition and a big problem: Foreclosed properties sold to investors at the courthouse steps (that is, when an investor outbids the bank) are, according to one source, selling for prices above market value.  “Investors have lost all sense of rationality and control in Maricopa County, Arizona,” says mortgage analyst Mark Hanson. “The third party sales (non-REO) are so hot that winning bids for houses in need of major rehab are selling for over 100% of fully rehabbed present value.”  According to Hanson’s sales data, by the time an investor spends the cash to rehabilitate the home to rental condition, he/she is likely 25% underwater on the home.

And these are the same sales that Hanson claims were selling for 60% of present value just 18 months ago.  Unfortunately, third party sales don’t count as comparables, nor do the post-rehab houses that investors rent. The buyers can’t sell them post-rehab for what they paid, so the values never make it into price statistics.  Investors in California are not quite as crazed as Arizona, according to Hanson, but they are still paying 90% of rehabbed value; that also puts them underwater on the investment once they’ve fixed up the home.  Yes, investors will get rental returns, but depending on monthly financing costs, and the upfront investment, they may not see the kind of returns they originally expected, and they may not be able to sell in the time frame they originally planned.

In its letter, NAR urged the agencies to create an advisory board as they explore new options for selling foreclosed properties to ensure that efficiently disposing of agency REO properties will minimize taxpayer losses and reduce the negative effects that distressed properties have on local real estate markets. 

 To prevent further REO inventory increases, NAR recommended that the agencies take more aggressive steps to modify loans and, when a family is absolutely unable keep their home, to quickly approve reasonable short sale offers that allow families to avoid foreclosure. NAR President Ron Phipps said that while federal programs have been put into place to help keep families in their homes, many of these have fallen short of expectations, and advocated that those resources be applied toward modifying loans and expediting short sales, which are typically less costly than foreclosure.  “Loan modifications keep families in their home and reduce defaults, while short sales keep homes occupied, helping stabilize neighborhoods and home values,” Phipps said. “Expanding resources and ensuring the use of already allocated funds for pre-foreclosure efforts is the best opportunity to reduce taxpayer costs and creates more positive outcomes for homeowners and their communities.”

Chase started a similar program in late 2010 that pays as much as $35,000 to short sellers and Wells Fargo has also paid five-figure incentives to short sellers.  BOA said it has completed 200,000 short sales over the past two years. These sales are generally more cost effective for banks than foreclosures. By avoiding foreclosure, the lenders avoid getting back distressed properties from delinquent borrowers which allows them to avoid property tax payments, maintenance expenses and legal fees that can build up for months, even years, as foreclosures work through the system.

Foreclosed properties are often poorly maintained, even sometimes sabotaged, by angry former owners, making them worth far less to the banks.  During the last three months of 2011, foreclosures sold for an average of about $150,000, according to RealtyTrac. Meanwhile, short sales sold for an average of about $185,000.  To qualify for Bank of America’s relocation payments, borrowers must obtain pre-approval on sale prices for their homes. The sale must begin by the end of 2012 and close by September 26, 2013.  The exact compensation is determined case-by-case based on a calculation that involves the home’s value, mortgage balance and other factors.