As the labor market improved, the number of homeowners who fell behind on their mortgage payments dropped in the final three months of last year to the lowest level since 2008, according to a national survey released Thursday by the Mortgage Bankers Association.
But the delinquency rate remains higher than what's traditionally normal, and the volume of homes in some stage of foreclosure returned to the record high of early 2010, the report said. The survey covered nearly nine out of 10 primary mortgages.
The data offer a mixed view of the housing market's prospects for recovery any time soon. While delinquency rates have improved across all types of home loans, a swelling supply of low-priced, foreclosed properties suggests that home values could keep eroding and further undermine the ailing housing sector.
"We have to clear out those distressed properties before we can talk about any kind of housing market recovery," said Guy Cecala, publisher of Inside Mortgage Finance. "There are signs of improvement, but I think it's a little early to break out the champagne."
The report's seasonally adjusted figures showed that 8.2 percent of the outstanding loans were delinquent in the fourth quarter of last year, down from 9.1 percent the previous quarter and 9.5 percent a year earlier. Those figures do not include loans that were in foreclosure.
Fewer loans were seriously overdue. The number that were at least three payments past due, for instance, fell to 3.6 percent from a high of 5 percent at the end of the first quarter of 2010.
Mortgages that were only one payment past due are at the lowest level since the recession began in late 2007, suggesting that the employment picture is improving, said Jay Brinkmann, the mortgage banking group's chief economist.
"First-time delinquency is very much a measure of distress in the employment system," he said. "I see all of this as pretty good news. It looks like we've clearly hit the turning point."
Even the percentage of homes entering the foreclosure process slipped a bit, to 1.28 percent from 1.32 percent, in the third quarter. Foreclosure starts rose in only 11 states, with the largest increase in Maryland, where the percentage of homes entering foreclosure rose to 0.9 percent.
Yet the number of loans stuck in foreclosure was up, and that was mostly because many of the country's largest lenders temporarily stopped seizing homes from delinquent borrowers in October after widespread reports of flawed and fraudulent documents.
With so many loans in limbo, the number of homes in some stage of foreclosure rose to 4.63 percent in the fourth quarter. That's up from 4.4 percent the previous quarter and 4.58 percent a year earlier.
About half of the foreclosures are concentrated in five states - Florida, California, Illinois, New York, and New Jersey, Brinkmann said. Four of those states require court approval for foreclosures. When problems with the foreclosure paperwork surfaced in the fall, many of the troubled loans got stuck in the legal process, adding to the foreclosure supply in those areas.
Bank of America, the country's largest financial institution, has since lifted its freeze, and other lenders are starting to do so. Even so, distressed properties continue to make up an unusually large share of home sales.
In January, nearly half of all home purchases involved a distressed property, namely foreclosures or "short sale" transactions that enable borrowers to sell their homes for less than they owe on their mortgages, according to the Campbell/Inside Mortgage Finance Housing Pulse, an index that tracks such sales.
Foreclosures tend to drag down the values of surrounding properties, making many borrowers vulnerable to losing their homes. That's because many borrowers end up owing more on their mortgages than their homes are worth. If they lose their jobs or face other financial setbacks, they are unable to sell or refinance their way out of trouble.
Cecala of Inside Mortgage Finance estimated that 4.5 million loans are seriously delinquent or in the foreclosure process already, based on Thursday's survey. Even if 1 million of those loans were modified each year and another 1 million foreclosures were sold, it would take more than two years to clear them off the market, he said.
"And that's assuming that no more foreclosures are added to that inventory," he said.