The percentage of mortgages that were more than 90 days behind or in the foreclosure process dropped to 7.03 percent in the third quarter from 7.31 percent in the second quarter and 7.89 percent in the year-ago period, according to the Mortgage Bankers Association (MBA).

The rate of seriously delinquent home loans, a proxy for the so-called shadow inventory of homes, fell to the lowest mark since 2008 when it was 6.3 percent as employment improved and recovering housing demand made it easier for homeowners to sell. It is considered great news for the housing market because it reduces concerns that the current backlog will exist long term, according to MBA officials.

The shadow inventory as of the second quarter fell 10 percent from a year earlier to 2.3 million homes, representing a six-month supply, according to a report from data provider CoreLogic. The company includes seriously delinquent loans, homes in foreclosure and bank-owned properties that haven’t been listed in its definition of shadow supply.

As the economy improves, delinquent homeowners are catching up on payments or finding alternatives to foreclosure. That’s helping to reduce shadow inventory - typically defined as homes with seriously delinquent mortgages, in foreclosure or held by banks and not for sale - and limiting the prospect that distressed properties will flood the market and depress prices.

The percentage of loans in the foreclosure process at the end of the third quarter was 4.07 percent, down 0.2 percentage point from June. That was the biggest drop in records dating to 1979, according to the MBA.

At the end of September, 2.32 million existing homes were available for sale, 20 percent fewer than a year earlier, according to the National Association of Realtors. That represented a 5.9-month supply, the lowest since March 2006, near the peak of the housing boom. The decline in inventory is helping to boost home selling prices as buyers compete for properties. U.S. home prices jumped 5 percent in September from a year earlier, the biggest increase since July 2006, CoreLogic Inc. said.

More borrowers were able to make their monthly payments as unemployment rate dropped to 7.8 percent in September, the lowest since January 2009.  

The overall U.S. mortgage delinquency rate - the share of loans at least one month late - fell to 7.4 percent in the third quarter on a seasonally adjusted basis from 7.58 percent in the previous three months, the MBA reported.

States such as California and Arizona that don’t require court approval for foreclosures are seeing the most rapid improvement in delinquencies, while judicial states such as Florida, New Jersey and New York are falling behind. The foreclosure rate for judicial states was 6.6 percent in the third quarter compared with 2.4 percent in non-judicial states, the largest gap going back to at least 2006, according to MBA officials.

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