Banks repossessed record number of U.S. homes in Sept.

“Lenders foreclosed on a record number of properties in September and in the third quarter, taking a bite out of the backlog of distressed properties where the foreclosure process was delayed by foreclosure prevention efforts over the past 20 months,” said James J. Saccacio, chief executive officer of RealtyTrac.

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However, the industry expects foreclosures to slow down in the near-term as the documentation scandal has stalled processes in every state.

“We expect to see a dip in those bank repossessions — and possibly earlier stages of the foreclosure process — in the fourth quarter as several major lenders have halted foreclosure sales in some states while they review irregularities in foreclosure-processing documentation that has been called into question in recent weeks,” said Saccacio.

According to RealtyTrac, foreclosure activity in the 24 states where home foreclosures are subject to judicial review accounted for 40 percent of all foreclosure activity in the third quarter. These states, where homeowners were the hardest hit by the foreclosure documentation issue, accounted for as much as 36 percent of bank repossessions.

The ongoing probe into documentation irregularities and the freezing of foreclosure activity by some banks could deal homeowners another blow, according to analysts.

According to Global Research analyst Tom Eley, the net impact of the halting of foreclosures by mortgage lenders would be a further weakening of house prices as it will delay hundreds of thousands of foreclosures and lead buyers away from foreclosed homes already on the market.

"The scandal speaks both to the dimensions of the social crisis and the criminality of the big banks. The immediate cause of the mortgage lenders’ rampant cheating on foreclosure paperwork is the tidal-wave of families ruined by the economic crisis -- a crisis itself set into motion by the banks’ predatory lending practices. The goal was to get people out of their homes as efficiently and ruthlessly as possible, skating over legal requirements relating to documentation," wrote Eley.

RealtyTrac's Saccacio says if lenders resolve the documentation issue quickly, it would result in a spike in foreclosure activity in the coming months.

“However, if the documentation issue cannot be quickly resolved and expands to more lenders we could see a chilling effect on the overall housing market as sales of pre-foreclosure and foreclosed properties, which account for nearly one-third of all sales, dry up and the shadow inventory of distressed properties grows — causing more uncertainty about home prices,” Saccacio said.

Nevada recorded the highest state foreclosure rate in the third quarter with one in every 29 housing units receiving a foreclosure filing.

Arizona came second, with one in every 55 housing units receiving a foreclosure filing, followed by Florida where one in every 56 housing units received a foreclosure filing. California was fourth with one in every 70 housing units receiving a foreclosure filing during the third quarter, according to RealtyTrac.

Meanwhile, analysts at Capital Economics said U.S. house prices have started to fall back in response to the plunge in sales following the expiry of the homebuyer tax credit in April. They said the recent foreclosure irregularities could affect the market negatively.

"It is mildly encouraging that home sales in August nudged up from their post-tax credit floor. But the recent rise in mortgage applications for home purchase is small given that mortgage rates have dropped to a record low," wrote Paul Dales and Paul Ashworth in a note.

Moreover, doubts about the legitimacy of foreclosures will hit the market further as at least one in four U.S. homes sold in the second quarter was undergoing the foreclosure process, according to RealtyTrac data.

"Finally, the freezing of foreclosure sales by some banks has placed another question mark over the near-term outlook for the housing market," wrote Ashworth and Dales.

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