Foreclosures continued to fall in May, dropping 2% from the previous month and down a full 33% year-over-year, according to the latest data from RealtyTrac. First-time default notices were down 7% from April and were 39% lower than the previous year’s level; foreclosure auctions increased 3% from April but remained 33% lower than May of 2010; and bank repossessions were down 4% and 29% on a monthly and annual basis, respectively.

Those numbers, unfortunately, continue to be skewed by processing delays as banks work through robo-signing issues. However, "there were some clues in the May numbers of what lies behind that mask," said James J. Saccacio, CEO at RealtyTrac, in a press statement.

"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," he said. "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."

While it’s hard to pin down when paperwork issues will be resolved, says Daren Blomquist, director of marketing communications at RealtyTrac, "it looks like it will be sometime in the second half of this year." And that, he says, will bring a lot more certainty to the mortgage servicing industry, "which in turn will bring more certainty to the foreclosure markets."

Such increased confidence is badly needed. According to RealtyTrac data, even as the number of properties in the foreclosure process has declined over the past six months, inventory of unsold bank-owned REOs went up in April and May due to low absorption rates.

"That points to continued weak demand from buyers, making it tough for lenders to unload their REO inventory," said Saccacio. "Even at a significantly lower level than a year ago, the new supply of REOs exceeds the amount being sold each month."

And until paperwork issues are resolved, says Blomquist, buyers aren’t likely to have the confidence necessary to absorb foreclosure inventory. "The [robo-signing] issue is really clouding the housing market and creating uncertainty among buyers who might otherwise be interested due to such low prices," he said on a call with Builder. While resolving the paperwork issues will likely bring more foreclosures to the market in the short term, absorption rates will improve, he says, because "buyers will have the surety of knowing if they buy a property that the title will be clear."

However, the fact that banks will be legally prepared to begin selling off foreclosed properties at full speed again doesn’t mean they will. Of the 875,491 properties RealtyTrac estimates banks having in their possession, the company estimates that only about 20% have hit the markets. And banks don’t seem to be in a rush to release the remaining 80%.

"They seem to be pretty willing to hold properties off the market until pricing gets better," Blomquist said. In his estimation, the fact that such a large percentage of the REOs are held by Fannie Mae, Freddie Mac, and HUD, likely means there is "some political pressure there not to tank the market again by throwing those [foreclosures] on."

In the meantime, Nevada continues to hold the highest foreclosure rate among states, with one in every 103 housing units receiving a foreclosure filing in May. Las Vegas alone, the city with the highest foreclosure rate among all metro areas in the country, has a foreclosure rate more than six times that of the national average, with one in every 89 homes receiving a filing last month.

In terms of sheer quantity, California came in first, with 51,906 properties receiving a foreclosure filing in May. Five state—California, Florida, Arizona, Michigan, and Nevada—accounted for more than half of all foreclosure activity in the country for the month.

The report’s most hopeful news is that new delinquencies continue to decline. Year-over-year, new default notices have been declining for 16 consecutive months. As estimating when the industry will be able to get past the current heavy foreclosure inventory and enjoy the benefits of these lower default rates, "there are certainly a low of variables," Blomquist says.

At the current pace of REO sales, RealtyTrac estimates the market has a 25-month supply of foreclosures on hand. When properties that are in foreclosure but have not yet been foreclosed on are brought into account, that estimate goes up to a 34-month supply, although not all of those will need to sell. All things considered, Blomquist says the market likely has a 25- to 30-month inventory on hand. However, "that’s assuming no more properties are going to go into foreclosure," he warns. "And we know that’s not the case."

Claire Easley is senior editor, online, for Builder.

Learn more about markets featured in this article: Greenville, SC.