The half-yearly foreclosure market report, released by RealtyTrac, revealed an increase in the overall foreclosure activity. As per this leading online marketplace of foreclosure properties, foreclosure filings for the first half of 2012 increased 2% from the prior six months, but dipped 11% from the prior-year period. This brought the total number of properties receiving default, auction or repossession notices to 1,045,801.

Though overall foreclosure activity was low (primarily due to decline in bank repossessions) in the second quarter, foreclosure starts – default notices issued and foreclosure auctions (depending on the state’s foreclosure procedure) – surged 9% from the prior quarter and 6% from the prior-year quarter to 311,010 properties. This was the first quarterly rise in foreclosure starts since the fourth quarter of 2009.

Moreover, during the second quarter, foreclosure starts increased in 31 states on an annual basis, including 17 states with judicial foreclosure process and the remaining with non-judicial foreclosure process. Further, the states with the highest foreclosure rates were Nevada, Arizona, Georgia, California, Illinois, Michigan, Colorado, Ohio and Utah.

Additionally, the procedure to complete the foreclosure of properties in the second quarter took an average of 378 days, up from 370 days in the previous quarter. Further, bank-owned properties took an average of 195 days to sell from the time they were foreclosed, up from 178 days in the first quarter.

The increase in foreclosure activity indicates that mortgage servicers have resumed distressed property dealings with renewed vigor. The primary reason behind this resumption is the $25 billion settlement deal that took place between five mortgage servicers – JPMorgan Chase & Co. ( JPM - Analyst Report ) , Bank of America Corporation ( BAC - Analyst Report ) , Citigroup Inc. ( C - Analyst Report ) , Ally Financial Inc. and Wells Fargo & Company ( WFC - Analyst Report ) , 49 states’ attorneys general and the regulators earlier this year.

However, with mortgage servicers finding other options – short sale and loan modifications – to prevent foreclosure, we believe that foreclosure activity would take time to show a significant upward trend. When all these alternatives would wear out, only then a property would be foreclosed.

As per the RealtyTrac report, there will be a gradual rise in foreclosure activity for the rest of the year. Also, there will be additional pressure on the home prices as many properties would come to the market due to the surge in foreclosure activities.

Moreover, a sharp rise in foreclosure starts indicate that there would be potential rise in short sale, where the homeowner sells the property at a lower amount than owned on his/her loan. Also, others could be repossessed by the banks and placed on the market at a significant discount. Thus, many properties are likely to end up in adding to the foreclosure inventory, which is expected to jeopardize the recovery of overall housing property market in the near future.

Though the leap in foreclosure may dampen the housing prices in the near-term, this will enable the housing market to revive in the longer term. Moreover, we hope that there would be enough number of buyers for these properties; otherwise the housing market will have little chance to regain a solid foothold.