The long-feared backlog of foreclosures that accumulated during the Robogate processing slowdown in 2010 and 2011 has declined further as the number of new foreclosures dwindled in August and completed foreclosures are being quickly absorbed in markets hungry for discount priced distress sales.

CoreLogic reported today foreclosure inventories have fallen to their lowest level since April 2010. Some 1.3 million homes, or 3.2 percent of all homes with a mortgage, were in the national foreclosure inventory as of August 2012 a decline from 1.4 million, or 3.4 percent, in August 2011. Month-over-month, the national foreclosure inventory was unchanged from July 2012 to August 2012. The foreclosure inventory is the share of all mortgaged homes in any stage of the foreclosure process.

In August, there were 57,000 completed foreclosures, down from 75,000 in August 2011 and 58,000 in July 2012. Since the financial crisis began in September 2008, there have been approximately 3.8 million completed foreclosures nationwide.

“The continuing downward trend in foreclosures and a gradual clearing of the shadow inventory are important signals that the recovery in housing is gaining traction,” said Anand Nallathambi, president and CEO of CoreLogic. “The reduction in foreclosure volumes is to some degree being facilitated by the rising popularity of alternative resolution methods, such as short sales and loan modifications.”

“August marks the fourth month in a row there were fewer completed foreclosures, which is more evidence that the housing industry is finding its footing,” said Mark Fleming, chief economist for CoreLogic. “While we are seeing improvement on a national level, there remain higher concentrations of foreclosures in some areas with five states accounting for nearly half of all completed foreclosures nationwide during the last year.”

The five states with the highest foreclosure inventory as a percentage of all mortgaged homes were: Florida (11.0 percent), New Jersey (6.5 percent), New York (5.2 percent), Illinois (4.8 percent) and Nevada (4.6 percent). All except Nevada are judicial states.

The five states with the lowest foreclosure inventory as a percentage of all mortgaged homes were: Wyoming (0.5 percent), Alaska (0.8 percent), North Dakota (0.8 percent), Nebraska (0.9 percent) and South Dakota (1.1 percent).

California’s housing market will continue to recover in 2013, as home sales are forecast to increase for the third consecutive year and the median price to rise for the second straight year, according to the California Association of Realtors’ 2012 forecast.

The C.A.R. forecast sees sales gaining 1.3 percent next year to reach 530,000 units, up from the projected 2012 sales figure of 523,300 homes sold. Sales in 2012 will be up 5.1 percent from the 497,900 existing, single-family homes sold in 2011. T

The statewide median home price is forecast to increase a moderate 5.7 percent to $335,000 in 2013. Following a decrease in 2011, the California median home price will climb a projected 10.9 percent in 2012 to $317,000.

“The housing market momentum which began earlier this year will continue into 2013,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. “Pent-up demand from first-time buyers will compete with investors and all-cash offers on lower-priced properties, while multiple offers and aggressive bidding will continue to be the norm in mid- to upper-price range homes.”

“The actions of underwater homeowners will play an important role in housing inventory next year, with rising home prices inducing some to stay put and others to list and move forward,” she said.

“The market has improved moderately over the past year, and we expect that to continue into 2013,” said C.A.R. President LeFrancis Arnold. “Sales would be even higher if inventory were less constrained in REO-dominated markets, particularly in the Central Valley and Inland Empire, where there is an extreme shortage of available homes. Sales will be stronger in higher-priced areas, where there are more equity properties and a somewhat greater availability of homes for sale.”

C.A.R.’s forecast projected growth in the U.S. Gross Domestic Product of 2.3 percent in 2013, after a gain of 2 percent in 2012. With job growth of 1.6 percent in California, the state’s unemployment rate should decrease to 9.9 percent in 2013 from 11.7 percent in 2011 and 10.7 percent in 2012.

“The wildcards for 2013 include federal, monetary and housing policies, state and local government finances, housing supply, and the actions of underwater homeowners - not to mention the strength of the overall economic recovery,” Appleton-Young continued.

Real estate professionals continue to be more optimistic about the direction of home values than homeowners. Fifty-one percent of real estate professionals expect home values to increase, up from 48 percent from last quarter. Thirty-four percent of homeowners expect home values to increase, up from 27 percent last quarter.

Eighty percent of real estate professionals and 62 percent of homeowners think home values will increase in the next two years. In contrast, just five percent of real estate professionals and 14 percent of home owners think home values will decrease in the next two years. Fifteen percent of real estate professionals and 24 percent of homeowners think home values will stay the same in the next two years, according to the third quarter 2012 HomeGain home values survey.

Eleven percent of real estate professionals expect home values to decrease in the next six months, down from 14 percent from last quarter. Twenty percent of homeowners expect home values to decrease in the next six months, down from 24 percent from last quarter. Thirty-eight percent of real estate professionals and 46 percent of homeowners believe home values will stay the same in the next six months.

According to surveyed agents and brokers, 76 percent of homeowners believe their homes are worth more than the recommended agent listing price. In contrast, 60 percent of home buyers believe homes are overpriced.

“Optimism about the direction of home prices continues to grow,” said Louis Cammarosano, General Manager of HomeGain. “The survey show an increase in optimism, especially over the course of the next two years, as 80 percent of real estate professionals expect home prices to be higher than they are today.” said Louis Cammarosano, General Manager of HomeGain.

Over 300 real estate agents and brokers and over 2,200 homeowners were surveyed.

In three months, short sales may screech to a halt unless legislation is extended that allows sellers to avoid paying taxes on the amount of their mortgages that lenders forgive when then sell their homes.

Since 2007, when Congress passed the Mortgage Forgiveness Debt Relief Act, the sellers have not had to pay income taxes on the value of the loss incurred by their lenders, which previously was considered income. Debt reduced through mortgage modifications as well as mortgage debt forgiven in a short sale qualifies for the relief. Normally, debt that is forgiven or cancelled by a lender must be included as income on the homeowner’s tax return and is taxable.

In order to qualify for the tax break, the cancelled debt must be used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. The maximum amount that can be forgiven tax free is $1 million per taxpayer.

Short sellers could face huge tax bills for transactions that close after January 1. If a borrower’s mortgage balance is $350,000 and his bank approves a short sale for $300,000, that $50,000 difference would be considered taxable income. For a homeowner earning $100,000 a year, their tax liability would increase 50 percent.

Several states, including California, ;have passed laws excluding debts forgive by modifications and short sales from state income taxes that would be owed by homeowners on short sales or modifications.

Loss of the tax break will encourage defaulting owners to choose a strategic foreclosure rather than increase their tax liability by seeking a modification or selling short. In recent years short sales have become nearly as prevalent as foreclosures as lenders have realized they lose less money with short sales and foreclosure processing time has grown to a year or more in some states. Short sales accounted for more than 30,700 home sales through May compared to 54,000 foreclosures, according to CoreLogic.

The tax forgiveness legislation has also encouraged owners to seek mortgage modifications that may result in the reduction of principal. Forgiveness of principle also creates a tax liability which the expiring law has eliminated for the past five years. Some 5.9 million total homeowners have received mortgage modifications either through federal or private sector lender initiatives since April, 2009, though not all received principal reductions.

With just three months to act, the real estate lobby in Washington is scrambling. Legislation introduced by Senator Debbie Stabenow of Michigan would extend tax relief through 2013, while a House bill sponsored by Representative Tom Reed of New York would extend the relief a year. Another bill sponsored by Representative Charles Rangel, also of New York, would extend it two more years.

States that suffered the greatest number of foreclosures, until recently largely hotbeds for discounted foreclosures and short sales, are leading the nation in price gains.

Home prices nationwide, including distressed sales, increased on a year-over-year basis by 4.6 percent in August 2012 compared to August 2011, the biggest year-over-year increase since July 2006, according to CoreLogic’s Home Price Index. The August 2012 figures mark the sixth consecutive increase in home prices nationally on both a year-over-year and month-over-month basis. The HPI analysis from CoreLogic shows that all but six states are experiencing price gains.

Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 4.9 percent in August 2012 compared to August 2011. On a month-over-month basis excluding distressed sales, home prices increased 1 percent in August 2012 compared to July 2012, also the sixth consecutive month-over-month increase. Distressed sales include short sales and real estate owned (REO) transactions.

States that lost the most value during the decline from April 2006 to August 2012 were Nevada (-54.7 percent), Florida (-44.3 percent), Arizona (-42.0 percent), California (-37.7 percent) and Michigan (-36.5 percent). Among the top states with the highest home price appreciation are: Arizona (+18.2 percent), Nevada (+9.0 percent), Florida (6.9 percent) and California (5.5 percent).

CoreLogic forecast that September 2012 home prices, including distressed sales, are expected to rise by 5 percent on a year-over-year basis from September 2011 and fall by 0.3 percent on a month-over-month basis from August 2012 as the summer buying season closes out. Excluding distressed sales, September 2012 house prices are poised to rise 6.3 percent year-over-year from September 2011 and by 0.6 percent month-over-month from August 2012. The CoreLogic Pending Home Price Index is based on Multiple Listing Service (MLS) data that measure price changes in the most recent month.

“Again this month prices rose on a year-over-year basis and our expectation is for that to continue in September based on our pending HPI forecast,” said Mark Fleming, chief economist for CoreLogic. “The housing markets gains are increasingly geographically diverse with only six states continuing to show declining prices.”

Like a Hallowe’en zombie rising from its grave, lucrative subprime mortgage lending is poised to make a comeback with the help of a forgiving secondary market, an improving housing market and new tools to assess risk.

Subprime lending?mortgages made to borrowers whose risk factors are so high they don’t qualify for prime loans?never entirely disappeared even though the practice was widely blamed for the 2007 crash of the secondary mortgage market that triggered the US housing crisis and a worldwide recession. In the latest survey of senior loan officers by the Federal Reserve in July, for example, six out of sixty lenders, all banks, said they still make high cost subprime loans to high risk home buyers. That’s more than twice subprime lenders as in April, when too few responded to the survey to be counted.

Five years after the subprime crash, a renaissance in subprime mortgage lending may be greeted warmly by Wall Street. In July, as the national housing market started to show signs of life, investor interest in non-agency subprime-mortgage bonds from 2005 through 2007, the years that produced the most defaults leading to the worst financial crisis since the Great Depression, soared to 5.4 percent on the private market. Securities backed by option adjustable-rate mortgages jumped over the past month by 7 percent to the highest level since May 2011.

“There’s been a lot of investors waiting on the sidelines until home prices stabilize and now that they have, they’re moving in,” said Adam Yarnold, managing director of securitized products trading in New York at Barclays’s investment-banking arm in July. In addition, “the absolute low level of rates out there is driving institutional investors like pension funds to put money into anything with” returns that can top 7.5 percent and so- called non-agency securities offer that potential, he said. Investors in mortgage bonds are gaining confidence the housing market has reached a bottom, in part because of a surge in money devoted to buying and renting out foreclosed homes, Barclays’s Yarnold said.

Subprime-mortgage securities lost an average 5.5 percent last year, Barclays’ index data show. Some of the debt fell as much as 30 percent from early 2011 peaks. Record defaults on subprime loans, which went to borrowers with poor credit or high levels of debt, sent bond prices tumbling and helped spark the financial crisis that led to $1.6 trillion in write downs and losses at the world’s biggest banks.

A major subprime lender, Residential Capital, is poised to reap billions in a bankruptcy auction of its subprime mortgage assets as high-profile bidders, including Fortress Investment Group’s Nationstar Mortgage Holdings and Warren Buffett’s Berkshire Hathaway line up for an Oct. 23 auction that could raise the money it needs to repay creditors. The key asset on the block is ResCap’s mortgage loan servicing and loan origination business. The sale is expected to raise at least $4 billion, which will then become part of a pool of money used to pay back Ally and other investors.

Though the GSE’s stopped buying subprime paper after the 2007, which drove virtually all major lenders out of the subprime mortgage market, tougher regulation and new tools using the latest technology to assess risk may make future subprime lending less risky.

A new tool “FICO Mortgage Score” introduced by CoreLogic last week helps lenders evaluate and approve applicants who otherwise might not qualify for a mortgage based solely on their traditional FICO score. The score combines a traditional FICO score with a supplemental score called CoreScore, a credit formula that debuted last fall from CoreLogic. CoreScore looks at financial records such as credit card borrowing, bank transactions and mortgage information, and examines the kinds of transactions likely to occur at the lower end of the income scale. These include car and rental payments and payday loans. The score even examines the record for missed child support payments.

Experian also recently launched a new credit score in June called Extended View, targeted for use by banks, credit unions and auto lenders, as well as phone and utility providers. Experian says the new score could bring as many as 64 million new borrowers into the lending fold.

As access to financing continues to stifle the housing recovery, the demand for subprime loans will surely be great among prospective buyers tho can’t meet today’s strict lending standards.. Only 39 percent of applications for purchase mortgages were approved and closed in August, according to Ellie Mae. The median FICO score for closed loans was 750 compared to 708 for denied applications. Last year the total volume of mortgages that ran through Ellie Mae’s Encompass360 software was approximately two million loan applications, or 20 percent of all U.S. mortgage originations.

About one out of eight, or 17 percent, or homeowners with a mortgage believes their home is worth less than the amount they owe when in fact the opposite is true, suggesting that large numbers of owners are undervaluing their homes, perhaps due to recent home price increases.

A new Rasmussen Reports national telephone survey of U.S. homeowners released last week shows that 39 percent say their home is not worth more than what they still owe on their mortgages, while 47 percent report their home is worth more than what they owe. Some 14 percent are undecided.

Yet only 10.8 million, or 22.3 percent, of all residential properties with a mortgage were actually in negative equity at the end of the second quarter of 2012, according to the latest data from CoreLogic. This is down from 11.4 million properties, or 23.7 percent, at the end of the first quarter of 2012. An additional 2.3 million borrowers possessed less than 5 percent equity in their home, referred to as near-negative equity, at the end of the second quarter.

Moreover, homeowner perceptions are turning more negative at a time when home values are improving. Scott Rasmussen, CEO of the research company that bears his name, said Rasmussen Reports has asked homeowners the question about home values and mortgages for years and it has never before fallen below the 50 percent mark. “This represents a sea change in personal finances that challenges core assumptions about the way our economy works,” he said.

CoreLogic, however, reports that negative equity is getting better. “The level of negative equity continues to improve with more than 1.3 million households regaining a positive equity position since the beginning of the year,” said Mark Fleming, chief economist for CoreLogic. “Surging home prices this spring and summer, lower levels of inventory, and declining REO sale shares are all contributing to the nascent housing recovery and declining negative equity.”

Ironically, another Rasmussen survey in August found that most U.S. homeowners are confident they know the current value of their home and think it is worth more than when they bought it. The survey found that 82 percent of Americans who own a home were confident they know how much the house is worth in today’s market. That includes 43 percent who were Very Confident. Just 16 percent were not very or Not At All Confident that they know what their house is worth.

The unprecedented and unexpected crash in inventory that is driving the nascent recovery by bolstering prices increases began in July, 2010 when listing counts on Realtor.com topped 2.8 million, and two years later have fallen by more than a third.

Even as the summer selling season ends, inventories on Realtor.com, which aggregates listings from more than 900 multiple listing services, are stilling declining an a double digit rate, falling more than 18 percent in August since 2011. Department of Numbers, which also tracks listing trends but accesses few MLSs, reports listings as of today are down 22.4 percent from a year ago.

However, two-year comparisons give a better sense of how far inventories have fallen in just two years. Since August 2010, when the decline began following the expiration of the federal tax credits earlier that year, Realtor.com carries nearly one million fewer listings?955,575?than it does now. That’s a 34 percent decline. At the height of the boom, in September 2007, Realtor.com carried more than 3.1 million listings.

Listings increased on a monthly basis from February through May in both 2011 and 2012 as sellers listed their homes at the outset of the spring-summer buying seasons. However, in both of those periods, monthly inventory totals were lower than they were 12 months earlier.

Over the two-year descent, the markets registering the greatest year-over-year decline in listings have changed but they share common characteristics?high levels of negative equity and low prices. In August 2011, a year into the decline, the markets leading the way were cities that had been ravaged by foreclosures in part because prices had fallen so low that owners were under water. These included Miami, Orlando, Phoenix, Boise and Ft. Myers.

After two years of lower inventory levels, prices improved enough in those markets to stabilize price and supply. Now new cities have taken the national lead for declining inventories, all in California where negative equity remains high: Oakland, Stockton, Fresno, Sacramento, Riverside, Bakersfield and San Jose.

The next quarter will demonstrate whether the inventory decline is finally ending or not. As we enter the fall, we pass the second anniversary of the beginning of the inventory and year-to-year comparisons are with months that already have experienced a 12 month drop. Realtor.com’s 1.84 million listing total in August 2012 is not far below last December’s 1.89 million listings. As activity slows this fall, the inventory decline may flatten out as the fall and winter months settle in, though that was not the case last year, when levels continued to fall until February 2012, when the seasonal build-up for the spring season began. This year, inventories are not falling as fast as they once were: Realtor.com’s inventory fell only 1.2 percent from July to August and Department of Numbers fell 2.8 percent from August to September.

The latest quarterly survey of housing economists and experts, which generally focuses on economic issues like price expectations, came up with a surprising result. As the final days of the Presidential and Congressional elections draw near, most participants said they would be happy to get rid of the crown jewel of housing policy, the mortgage interest deduction.

More than half of respondents in the September 2012 Zillow® Home Price Expectations Survey, want to eliminate the mortgage interest tax deduction. Some 50 percent said it should be phased out gradually and 10 percent want it cut as soon as possible. Thirty percent said the deduction should have more eligibility restrictions placed on it, while 11 percent believe it should remain as-is.

“Although the mortgage interest deduction remains enormously popular with existing and aspiring homeowners, it costs the federal government about $90 billion a year,” said Terry Loebs, founder of Pulsenomics LLC, the company that conducted the survey for Zillow.

“Time will tell whether the unprecedented fiscal challenges facing the U.S., coupled with a housing market now on the mend, will embolden more policymakers to touch this lightning rod,” Loebs continued.

Meanwhile the MID remains under attack in national campaigns and the media. Efforts to get a plank in the National Republic Party platform failed in August and the effort generated critical media coverage included an August 30 column in Bloomberg View by Amity Shlaes is a senior fellow and director of the Four Percent Project at the George W. Bush Institute.

“To many today, however, the chief appeal of repeal is the reduction of price distortion. You are more likely to lose a house if you paid too much, because its true value was muddied by politics. You are more likely to keep a house whose price at the time of purchase was transparent and derived from the relative quality of the investment,” she wrote

“In tandem with the removal of other tax distortions, including excessively high income-tax rates, a reform could finally rationalize our irrational investment landscape. Steve Forbes was right in 1996. People might well invest more in houses than we imagine if, for once, they know what those houses are really worth.”

The use of mortgage financing in the housing market jumped sharply in the month of August, but the use of FHA financing declined, suggesting the government program is losing favor and private lenders are gaining market share.

“Conventional mortgages are making a comeback while FHA mortgages are not,” commented Thomas Popik, research director for Campbell Surveys today . “Reasons for the growth in conventional mortgages include low rates, increased underwriting of high LTV mortgages by private mortgage insurers, and a price structure including insurance premiums that is cheaper than the FHA alternative.”

Mortgages were used to finance 68.9 percent of home purchase transactions in August, up from 67.5 percent in July. Significantly, not all mortgage financing products saw the same gains in market share. FHA-financed transactions rose only slightly from 25.5 percent in July to 25.9 percent in August. Back in January, FHA transactions accounted for 27.3 percent of all home purchase transactions.

Ellie Mae reported last week that the FHA share of mortgage originations has declined from 25 percent in May to 21 percent in August. During the same period, conventional mortgages increased their sales from 65 to 70 percent of all new mortgages. Purchase mortgages increased from 44 to 47 percent.

Real estate agents responding to the latest HousingPulse survey indicated mortgage availability has improved over the summer months, especially for homebuyers with less than 20% cash down payments. “Mortgages for home buyers with less than 20% down were available more than in previous months,” commented an agent from California. “Contrary to media reports, there is no shortage of mortgage money available for buyers with down payments less than 20 percent,” reported an agent in Texas.

Real estate agents also commented on historically low interest rates. “Amazing rates - less expensive to pay mortgage per month than to rent. Unbelievable opportunity and buyers know it,” exclaimed an agent in California. “The money is almost free, with 3.785 percent being about average for a 30 year fixed-rate mortgage with 3.5 percent down,” contributed an agent in Washington State.

Despite reports of improving access to financing from real estate markets, the National Association of Realtors is continuing its battle against for greater access to credit. Last week NAR’s president Mo Veissi urged Fed Chairman Ben Bernanke to weigh in on three key rule proposals — the Qualified Mortgage (QM), the Qualified Residential Mortgage (QRM), and the Basel III capital standards — that Veissi said are both putting a chill on lending and have the potential tighten credit further. All three individually and certainly together have the potential to tighten credit.

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