Foreclosures continued to drag housing prices downward in March and during the first quarter of the year, according to the Federal Housing Finance Agency (FHFA) house price index. The index, which pulls its data from Fannie Mae– and Freddie Mac–acquired mortgages, posted a 0.3% decline from February and a drop of 2.5% between the fourth quarter of 2010 and the first quarter of 2011.

These numbers are somewhat skewed, however, by a recent change in how FHFA calculates the data. Without the change, March’s numbers would have remained flat and the quarterly change would have represented a slightly steeper decline of 3.0%.

With declines reported in nearly every area of the country, all eyes continue to be on the foreclosure market and its pending shadow inventory.

Striking a hopeful tone, Edward DeMarco, acting director at FHFA, pointed out that “serious delinquency rates … are declining,” in a press statement today.

However, according to Rick Sharga, senior vice president of RealtyTrac, only 20% of the 1.2 million homes in some stage of foreclosure have hit the markets. Without knowing when the remaining 80% will be unleashed, it’s hard to predict when prices will stabilize, even if tightened lending standards in recent years have cut back on recent delinquencies. 

In addition to the foreclosures currently on banks’ books, there are about four million homes with delinquent loans. Unfortunately, as Diane Thompson, an attorney with the National Consumer Law Center, recently pointed out in a testimony before the U.S. Senate banking subcommittee, banks have a financial incentive to foreclose. Thanks to revenue from foreclosure fees and the fact that foreclosing on a home requires less staff than loan modification, it is unlikely that even many of the loans that could qualify for the Home Affordable Modification Program (HAMP) will avoid bank repossession or short sale. 

At the hearing, Thompson and others advocated for new government guidelines on loan servicing, which TheNew York Times reported would include requiring banks to evaluate homeowners for a modification before any foreclosure-related fees are imposed. And banks would be blocked from foreclosing if they failed to offer a modification when standardized criteria indicated a loan should qualify for one. 

Sens. Jack Reed and Sheldon Whitehouse of Rhode Island, and Sen. Sherrod Brown of Ohio have introduced bills in the Senate establishing such standards.

In the mean time, “foreclosures and other distressed properties … may be delaying price stability or recovery,”DeMarco said.

Claire Easley is senior editor, online, at Builder.

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