by Luke Mullins

Although the U.S. housing market witnessed its smallest annual increase in foreclosure activity in four years last month, distressed-property tallies are expected to remain in an elevated range for some time. Foreclosure filings were reported on more than 308,000 American homes in February, RealtyTrac said Thursday. That's a 2 percent decline from January but a 6 percent increase from a year earlier. All told, February represents the 12th consecutive month with more than 300,000 foreclosure filings.

The slight monthly decrease is linked to two key factors, says Rick Sharga of RealtyTrac. First, Uncle Sam's sweeping housing rescue initiative--known as the Home Affordable Modification Program--has worked to slow the pace at which troubled mortgages go into foreclosure, as lenders try to determine if borrowers qualify for government assistance. In addition, the snowstorms that hammered the East Coast last month appear to have hogtied the process further. States like New Jersey, New York, Pennsylvania, and Delaware--all of which were pummeled by the winter storms--saw foreclosure filings drop 20 to 40 percent from the previous month. "Our field team that collects [data] reported back that clerks' offices and courthouses were closed for a number of days over the course of the month," Sharga says.

Still, a number of forces are working to push foreclosures higher from here. The sluggish labor market isn't expected to turn around anytime soon. Economics firm IHS Global Insight projects the national unemployment rate--which now stands at an uncomfortably high 9.7 percent--to decrease only slightly, to 9.6 percent, by the end of the year. The rickety employment environment increases the likelihood that homeowners will lose the income stream they need to pay the mortgage. Meanwhile, many homeowners who have enrolled in Uncle Sam's housing rescue will eventually fall behind on their mortgage payments again, says Celia Chen of Moody's "As those loans fall out of the HAMP program, we will see a greater number of foreclosures," she says. At the same time, many homeowners with exotic mortgages are expected to face sharply higher payments in the coming months as lower initial rates expire. Many of these mortgage holders may find themselves unable to afford the new payments.

But Pat Newport of IHS Global Insight believes that the issue of negative equity--or owing more on your mortgage than your property is worth--will play the decisive role in the future of the foreclosure crisis. About 1 in every 4 homeowners has negative equity. That's scary news for the housing market because borrowers in this predicament are more likely to simply walk away from their homes. "There are 5 million homes that are over 25 percent underwater," Newport says. "If a lot of those people start walking away from their homes, we are going to see another wave [of home foreclosures]."

But Mike Larson of Weiss Research argues that while foreclosures may move modestly higher from February's levels, the figures are likely to remain in the current range. "Have we 100 percent for sure seen the absolute high point for foreclosures?" Larson says. "I don't know if we are there yet, but I think that we are probably leveling off at around what will likely be the peak." He points to recent stabilization in employment, home prices, and the overall economy to support his position.

For his part, Sharga agrees that foreclosures will flatten out at their current, elevated levels. He expects foreclosures to begin posting annual decreases in late 2011. "We are banking on economic recovery, which means job creation and people will be able to afford their homes," he says.

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