Federally insured banks reduced their inventory of previously foreclosed properties by 18% over the last year, according to the Federal Deposit Insurance Corp.

The banks held $41.7 billion in REO as of June 30, down from $51.2 billion at the same point one year prior. The dollar amount represents the carrying value of the foreclosed assets, often based on the unpaid principal of the loan. The FDIC does not break down how many individual properties the banks hold.

Still, levels have been on the decline since a high of more than $53 billion in the third quarter of 2010, according to the collective bank earnings report.

To give a comparison, Freddie Mac held an inventory of roughly 53,000 REO at the end of the second quarter for a carrying value of more than $8.6 billion, according to its latest financial filing.

If the banks account for these properties the same way, they could collectively hold more than four times as many foreclosed properties as Freddie, putting the number at over 256,000 REO.

Mortgage bond analysts at JPMorgan Chase (JPM) estimate a total inventory of roughly 500,000 REO, which includes the banks, both government-sponsored enterprises and the Department of Housing and Urban Development.

More is on the way. Another 1.3 million homes are in some stage of foreclosure, CoreLogic (CLGX) estimated Monday, down slightly from 1.5 million one year ago.

The banking industry is healing, according to the FDIC report. Federally insured institutions reported $34.5 billion in collective net income for the second quarter, up 20% from one year ago and the 12th straight annual increase.

The number of problem institutions fell for the fifth quarter in a row as well to 732 firms. It's the small number since the end of 2009.

"Levels of troubled assets and troubled institutions remain high, but they are continuing to improve," said FDIC Acting Chairman Martin Gruenberg.

The improvement translated into more lending and thus continued growth. Business lending increased 15% from last year.

American Banker Association Chief Economist James Chessan said despite the improvements, housing continues to stall lending.

"Our business customers are telling us that they are hesitant to expand or take on more debt in today's uncertain environment. In addition, the housing sector continues to be a drag on total lending volume, and will limit loan growth to a gradual pace for the foreseeable future," Chessan said.