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Foreclosures slowed between a peak in 2010 and the close of 2012 due to pending legal action against big banks and growing demand by the federal government that foreclosure practices be better executed and monitored. Now that settlements have been reached and a U.S. housing recovery is in progress, however, many experts expect foreclosure activity to increase in 2013 and beyond. Despite a national decrease in the average, foreclosures still rose in 25 states during the two-year moratorium and now the rest may be poised to play catch-up. For more on this continue reading the following article from TheStreet.

Foreclosure activity fell in 2012, helping to push home prices higher, as lenders pursued alternatives to foreclosure in the wake of a nationwide mortgage settlement and tougher state foreclosure laws.

Foreclosure filings were reported on 1.8 million properties in 2012, according to RealtyTrac's year-end 2012 Foreclosure Market Report. That is down 3% since 2011 and is more than 36% below the 2010 peak of 2.9 million properties.

Foreclosure activity has been on the decline since 2010, when banks were found to have violated laws in foreclosing upon borrowers. A moratorium on all foreclosure activity followed and new servicing standards were implemented under a settlement with the five biggest banks in March 2012, making it tougher for banks to foreclose.

Banks agreed to provide relief to borrowers in the form of principal reductions and loan modifications and to actively pursue alternatives to foreclosure in the form of short sales.

Banks also appear to have voluntarily shifted away from foreclosures in states that follow a judicial foreclosure process, which requires the lender to prove in court that the borrower is in default in order to foreclose. The courts in these states are so overwhelmed that they are severely backlogged and the average time it takes to complete a foreclosure often runs into a few years.

The average time to complete a foreclosure takes 1089 days in New York, for instance, against a national average of 414 days.

However, despite the broad shift away from foreclosures, not all states saw a decline in activity in 2012, according to the report.

Foreclosure filings still rose in 25 states, 20 of which use the judicial foreclosure process.

Foreclosures increased the most in New Jersey, Florida, Connecticut, Indiana, Illinois and New York.

Florida posted the highest foreclosure rate at 3.11% followed by Nevada and Arizona. In 2011, Nevada and Arizona occupied the first two spots. However, both states experienced a decline in foreclosure activity. Both states follow a non-judicial process, where banks can foreclose upon borrowers more quickly.

Coincidentally, Nevada and Arizona both saw a strong rebound in housing prices in 2012, while states such as Florida, New York and New Jersey lagged, highlighting the divide between judicial and non-judicial foreclosure states.

Analysts point out that housing markets where foreclosure inventory has been speedily cleared have seen the swiftest rebound, while those markets that have a longer process continue to be under pressure.

Foreclosure inventory dropped to a 57-month low in May 2011, but has since climbed up from that level. It still remains 31% below peak levels. The low inventory levels may have helped push prices higher and given sellers the upper hand in some markets.

RealtyTrac Vice President Daren Blomquist, however, expects foreclosure activity to catch up in 2013.

""We expect to see continued increases in judicial foreclosure states near the beginning of the year as lenders finish catching up with the backlogs in those states, and another set of increases in some non-judicial states near the end of the year as lenders adjust to the new laws and process some deferred foreclosures in those states," said Blomquist in a statement.

"The influx of foreclosure activity in 2012 in many local markets should translate into more foreclosure inventory available for sale in 2013 in those markets," Blomquist added. "That is good news for buyers and investors, but could result in some short-term weakness in home prices as the often-discounted foreclosure sales weigh down overall home values."

Florida had the biggest share of foreclosure inventory at 305766 properties. Fannie Mae (FNMA), Freddie Mac (FMCC) and the Department of Housing and Urban Development held 26% of all foreclosed homes, followed by Bank of America (BAC) at 8%, Wells Fargo (WFC), US Bancorp (USB) and JPMorgan Chase (JPM) at 4%.

This article was republished with permission from TheStreet.