An unsettling paradox has emerged: mortgage delinquencies are on the rise, but lenders are increasingly sluggish to send out notices of defaults (NODs) to troubled homeowners. As the mortgage meltdown spreads to higher tier properties and prime borrowers, foreclosure sales and mortgage delinquencies are becoming increasingly common, up 9.5% in California between the second and third quarter of this year. However, NODs, which are sent to borrowers when they become more than three months late on a mortgage payment, have decreased 10.3% statewide compared to the summer months of the previous year.

As mortgage delinquencies and NODs historically (and logically) move in lockstep, it is clear that some unnatural element is hindering the normal cyclical progression of late payment, to NOD, to foreclosure. This strange phenomenon could indicate more loan modifications are being processed, lenders are agreeing to short-sales more frequently or lenders are simply struggling to handle all the paperwork due to a lack of processing and mitigation infrastructure.

Though it is reported that 82% of homes taken back by lenders in California from February 2008 through July of 2009 have been resold, many people experienced in the real estate industry persist there is a larger phantom inventory of unsold REO properties and properties teetering on the brink of foreclosure being intentionally withheld from the market. Under that belief, lenders are motivated to retain their REO properties or delay an evitable foreclosure in order to later release them in controlled spurts to avoid flooding the market with a tsunami of cheap foreclosure sales.

first tuesday take: If lenders dump the entirety of their cheap phantom inventory into the market all at once, it will depress property values and severely weaken their bottom lines. However, if lenders unload their REO inventory systematically, the foreclosure sales will have a neutered effect on the market and lenders will be able to realize a greater profit (or reduced loss).

Re: “Mortgage puzzle: Foreclosures rise by defaults fall,” from The Sacramento Bee.