3 Reasons Foreclosure Activity is Skewed

"Foreclosure Activity Drops to 5-Year Low in September." That's what major media outlets are reporting, but is it accurate?

From RealtyTrac:

"The decrease in September helped drop the third quarter foreclosure numbers to the lowest level since the fourth quarter of 2007. Foreclosure filings were reported on 531,576 U.S. properties during the quarter, a decrease of 5 percent from the second quarter and a decrease of 13 percent from the third quarter of 2011 -  the ninth consecutive quarter with an annual decrease in foreclosure activity. The report also shows one in every 248 U.S. housing units with a foreclosure filing during the quarter."

The real estate market's (NYSEARCA:XHB) foreclosure activity is only "improving" because of the way banks are handling the delinquency process. Instead of taking back homes with delinquent mortgages, they're choosing to settle with short sales. In most states, this has produced a backlog of foreclosures that will eventually flood the market with more inventory. Here are three reasons why September's foreclosure data looks better than what it really is:

1) Banks, in most cases, don't have the legal paperwork to foreclose; (remember the robo-signing scandal?)

2) Banks prefer the customer "friendly" short sale versus the "evil" foreclosure process and besides that, the end result on a bank's balance sheet is roughly the same;

3) Banks don't like foreclosures because the homes require maintenance and renovation. Plus too, foreclosed homes fetch depressed resale prices.

What's really occurring is an artificial housing (NYSEARCA:ITB) recovery precipitated by bank behavior. With mark to myth mortgages (NYSEARCA:MBB) on their balance sheets, banks have little incentive to foreclose on delinquent borrowers when they can have the Federal Reserve bail them out. Just put bad mortgages into a lead bucket labeled "Bernank-ster" and exchange them for Federal Reserve Notes.

So by removing millions of distressed properties from the market, home buyers are actually chasing a limited supply of real estate and thereby lifting the prices of existing inventory higher. And what's the superficial effect? Lower foreclosure activity.

Even the data people admit this much.

Daren Blomquist, vice president at RealtyTrac said, "The other shoe is dropping quite loudly in certain states, primarily those where foreclosure activity was held back the most last year. A backlog of delayed foreclosures will likely build up in those states as lenders adjust to the new rules, with many of those delayed foreclosures eventually hitting down the road. (For specific state foreclosure activity, see chart labeled "A Tale of Two States")

The ETF Profit Strategy Newsletter looks beyond the surface of crowd "wisdom." The October issue includes our Investment Theme Report, support/resistance for major asset classes, and profit/loss ratios for trading success. 

Follow us on Twitter @ ETFguide