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TheStreet Open House

Foreclosure Starts Plummet on Mortgage Settlement: LPS

Stocks in this article: BAC C JPM WFC

NEW YORK ( TheStreet) -- New foreclosure filings dropped sharply in October, as banks scrambled to comply with new servicing requirements under the national mortgage settlement.

According to the October Mortgage Monitor Report by Lender Processing Services, foreclosure starts declined 21.9% in October from the previous month and almost 48% lower than a year ago period. Foreclosure inventory fell by 7%.

But the drop-off is likely to be only temporary according to LPS Applied Analytics Senior Vice President herb Blecher.

"This decline coincided with the implementation of new procedural changes outlined in the National Mortgage Settlement, which requires, among other things, that mortgage servicers provide written notice to borrowers 14 days prior to referring a delinquent loan to a foreclosure attorney. This has resulted in what is likely a temporary slowdown in foreclosure starts that we do not believe is indicative of a longer-term trend,"said Blecher in a statement.

The five biggest mortgage servicers- Bank of America (BAC - Get Report), JPMorgan Chase (JPM - Get Report), Citigroup (C - Get Report), Wells Fargo (WFC - Get Report) and Ally Financial- entered into a $26 billion settlement with federal and state regulators earlier this year over alleged fraudulent foreclosure practices, better known as "robo-signing".

Under the agreement, banks are required to offer various forms of mortgage relief to borrowers and also adhere to stricter standards regarding foreclosure. In states where banks need to prove a borrower is in default in court- judicial foreclosure states- scrutiny of foreclosure cases has been heightened.

Other states such as Nevada and California have enacted tough laws protecting borrowers from wrongful foreclosure practices.

The result has led to a slowdown in foreclosures, with banks increasingly preferring to pursue alternatives such as short sales and loan modifications.

Still, the pipleline of delinquent loans remains large.

The nationwide delinquency rate reduced to 7.03%, according to the LPS report, but that is still well above normal. States with the highest percentage of delinquent loans include Florida, Mississippi , New Jersey, Nevada and New York.

It remains uncertain how banks will continue to work through their problem loans and whether the shift from foreclosures is really permanent.

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