The number of bank repo homes in August declined by 12.7 percent compared to the previous month, but default rates remained high, according to a real estate research firm.

As the number of foreclosure cases dropped by 0.5 percent compared to July, the number of repossessed houses repossessed by banks also dropped by 12.7 percent. More than 540,000 homes have been taken bank by lenders from January 1 to August 31.

According to housing analysts, the efforts of the federal government to pressure lenders and servicers to slow down their foreclosures and work out loans could be now making a significant dent on foreclosure filings. Another reason could be the decision of banks to delay their foreclosures or repossession of properties as they wait for better options.

Some lenders who have a lot of unsold vacant foreclosures may have decided not to pursue immediately repossessions and evictions to save themselves from maintaining the properties. They may have assumed that the delinquent borrowers would care for the properties.

Additionally, there had been many cases where delinquent homeowners were able to restore their loans to current status without help from loan modifications, reducing the number of units going to lists of bank repo homes.

According to data released recently by the Boston Federal Reserve, 30 percent of homeowners who failed to make two monthly payments were able to pay their arrears and make their accounts current.

The rise in short sales could be another reason for the drop in foreclosure actions, according to HBN Interactive president Duane LeGate. Lenders prefer short sales if they see that the home price is reasonable.

The one thing that is clouding the horizon is the scheduled resetting of option adjustable rate mortgages starting this fall. Based on a recent Fitch Ratings report, $29 billion of the $200 billion worth of option ARMS taken out during the housing boom will reset to much higher monthly payments by the end of 2009 and $67 billion will adjust next year.

The average monthly payment increase would be 63 percent, which is equivalent to $1,053, an amount too high and unaffordable for many borrowers.

Based on data from First American LoanPerformance, more than 60 percent of all borrowers who took out option ARM loans and more than 80 percent of all borrowers who took out option ARMs from 2006 to 2007 only pay the minimum amount. These very low monthly payments have actually pushed up the principal balances, making monthly payments unaffordable when they reset and pushing more mortgages into bank repo homes listings.