Loan Defaults Drop, But the Housing Market Is Still a Mess

Default notices -- the first step along the dreary road to foreclosure -- actually fell in April for the first time since 2005. But that sounds a lot more encouraging than it actually is.

The same set of numbers, from RealtyTrac, also reports that bank repossessions hit a record high in April. Taken together, these two pieces of data mean that banks are simply shifting their focus to seizing the houses that are already in the foreclosure process and not worrying as much about notifying delinquent homeowners that they missed a payment.

Here are a few more signs that real estate people singing "Happy Days are Here Again" are completely delusional:

Strategic defaults and redefaults are the new scourge of the housing market. Strategic defaults are where people can make their mortgage payments but are deliberately -- brazenly -- making the decision that it isn't worth it when the house is appraised at less than they owe. The stigma attached to walking away is evaporating at such an alarming pace it prompted JPMorgan Chase (JPM) to issue a warning to investors last week. Freddie Mac (FRE) executive VP Don Bisenius begged borrowers to think of their neighbors' property values before purposely defaulting on an underwater loan.

Redefaults happen when borrowers fail a second time to pay their mortgage on a modified loan. Despite President Obama's aggressive talk on loan modifications, more than half of rejiggered loans are falling 60 or more days past due 9 months after being modified.

Adjustable rates are still resetting. Over the next two years, billions will be added to the monthly mortgage bills of homeowners with "option ARMS'' and other adjustable rate loans. For the last six months, real estate brains have been poo-pooing the big second wave, saying that a lot of people stuck with these bad loans have either modified them since or already gone into foreclosure. But there are still almost 600,000 ARM loans outstanding.

The leftovers of these toxic loans are almost entirely concentrated in the "sand'' states: California, Florida, Nevada and Arizona -- a silver lining of sorts, unless you happen to own in one of those sand states.

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