UPDATE 1-U.S. foreclosures up for 1st time in 27 months

(Reuters) – U.S. foreclosure starts rose year-over-year in May for the first time in more than two years as banks resumed dealing with distressed properties after a mortgage abuse settlement earlier this year, data firm RealtyTrac said on Thursday.

The $25 billion settlement between major banks and states, formally approved in April, had been expected to jump-start foreclosure proceedings that were previously stalled by uncertainty about the liability of banks.

Foreclosure starts increased 12 percent from April to 109,051 homes in May. They were up 16 percent from a year ago, breaking a string of 27 straight months of annual declines.

By moving houses out of the so-called “shadow inventory” and onto the market, the increase in foreclosures could be a drag on the fragile U.S. housing recovery, which has shown signs of gaining a bit more traction in the last few months.

“That the May numbers were up the month after that settlement was completed is an indication that lenders are more confident that there are clear ground rules to foreclose now,” said Daren Blomquist, RealtyTrac’s vice-president.

“The banks are getting to a place where they consider their foreclosure processing issues resolved, so they’re confident enough to go ahead and push through more foreclosures.”

Sales of previously owned homes hit their highest level in nearly two years in April, while a measure of prices edged higher for a second straight month in March. Many economists think residential building will add to U.S. economic growth this year for the first time since 2005.

Blomquist said he expected that many of properties entering foreclosure to result in short sales, which can put downward pressure on prices. In a short sale, a home is sold for less than the value of the mortgage and the lender agrees to release the borrower from further obligation. In the first quarter, short sales rose 25 percent to a three-year high.

However, Paul Diggle, a property economist with Capital Economics, said that with inventories lean and signs growing of a pick up in demand, it was a good time for some of the backlog of foreclosures to come onto the market.

“The market actually needs to stop tightening and hover around current levels of supply,” he said.

A report released on Thursday by Harvard’s Joint Center for Housing Studies concluded that the housing market was showing “signs of a turnaround,” but cautioned that the recovery hinges on continued job creation.

“While still in the early innings of a housing recovery, rental markets have turned the corner, home sales are strengthening, and a floor is beginning to form under home prices,” Eric Belsky, managing director of the center, said in a statement.

The report warned that the large backlog of around two million homes in foreclosure and the more than 11 million homeowners who are “under water,” or owing more on their mortgages than their homes are worth, would hinder a full recovery. It said that was particularly the case in areas with above-average foreclosure rates.

RealtryTrac said bank repossessions increased 7 percent after sinking to a 49-month low in April, with 54,844 homes repossessed in May.

Overall foreclosure activity, which includes default notices, scheduled auctions and bank repossessions, affected 205,990 properties in May, a 9.1 percent increase from April.

The figure was 4.2 percent lower, however, than in May 2011.

Dean Baker, co-director of the Center for Economic Policy and Research said the rise in foreclosures was a reflection of the improving market.

“I don’t think this is either surprising or a disaster from the economy’s standpoint,” he said. “Banks have more reason to think that they can sell foreclosed properties at a reasonable price.”

Georgia’s foreclosure activity increased by 32.9 percent from April and 30 percent from May 2011, making it last month’s leader in foreclosure activity, ahead of Arizona, Nevada and California, the report said.

Nevada’s foreclosure activity was down 66 percent from a year ago but it still has the third-highest rate of any state in the country.

The Riverside-San Bernardino metro area in southern California had 8,388 properties with foreclosure filings in May, a 19 percent increase from April. One out of every 179 housing units is in foreclosure, over 3.5 times the national average.

New Jersey continued April’s trend, with 1,136 foreclosure starts in May, an annual rise of 118 percent. In April, foreclosure starts rose 180 percent annually.

By Anna Louie Sussman

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