In another sign that the worst of the housing crisis is behind the Bay Area, foreclosures dived in the South Bay, East Bay and Peninsula in September, ForeclosureRadar reported Thursday.

While the drop in foreclosures is good news for struggling homeowners, the declining number this year is partly behind a shortage of homes for sale.

That has been frustrating to investors and first-time homebuyers looking for lower-priced homes to buy.

The steep drop -- mirrored in California's foreclosure activity -- came as five major banks prepared to implement the standards of a national mortgage settlement.

The banks -- Citi, Wells Fargo, JPMorgan Chase, Bank of America and Ally/GMAC -- agreed to the settlement in the wake of a "robo-signing" scandal over forged and faulty foreclosure documents. That settlement's more than 300 provisions kicked in Oct. 1.

Foreclosures -- homes taken back by the bank or sold at the courthouse steps -- dropped 21 percent from August in the four counties of the East Bay, Peninsula and South Bay, the Discovery Bay foreclosure tracking service reported.

The 687 foreclosures were just under half those of August 2011, when 1,289 homes were put on the auction block, according to the report.


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Notices of default, the first step in the foreclosure process, dropped 23 percent from the previous month in the four counties. Over the year, the number of notices banks sent out was half that from a year ago. There were 1,141 notices compared with 3,436 in September 2011.

Banks appear to be "in no rush" to foreclose, said Sean O'Toole, the company's CEO.

As foreclosures drop, banks are turning more to short sales -- the sale of a home for less than the value of its mortgage -- and loan modifications to deal with struggling borrowers.

That can be seen in the large backlog of homes in the foreclosure process, ForeclosureRadar spokeswoman Michelle Lenahan said.

For example, about 5,700 homes in Contra Costa County are in some stage of foreclosure.

If homebuyers "are wondering where their inventory is, it's in all those homes in process but not making it to a trustee sale," Lenahan said.

The shortage is driving up prices, which may be persuading some homeowners who have received default notices to delay seeking a short sale, said Steve Mun, a short-sale specialist with Keller Williams in Cupertino. Mun said he's one of a group of preferred specialists two major banks refer people to when they send out default notices. "But I'm not getting any calls," he said.

"Lately everybody seems to be of the notion that housing is coming back," Mun said. "I'm sure that people in difficult situations are hoping that something can come of it, and maybe they will get a huge offer and get out of their situation."

Part of the national settlement includes new restrictions on a sharply criticized practice called "dual tracking." The practice has frustrated tens of thousands of homeowners who have been abruptly foreclosed on even as they are working on a mortgage modification with the same bank.

Dual tracking will be outlawed in California on Jan. 1, when legislation banning it takes effect.

Contact Pete Carey at 408-920-5419.