The amount of California foreclosure cancellations increased 26.5% in December to 13,243, primarily due to loan modifications.  And for the first time this number overtook foreclosures reaching real-estate owned (REO) status, according to ForeclosureRadar, which tracks foreclosure activity in the state. In December, the amount of foreclosures heading back to the banks, REO, dropped 11.9% from the previous month to 12,437. Significant declines in foreclosure discounts by lenders drove the decrease in sales to third parties, according to the report. Lenders discounted the opening bid on foreclosure auctions on the courthouse steps by nearly 40% for most of 2009, but in December lenders offered only 33.7% discounts. The fact that cancellations overtook REO sales doesn’t mean a vast amount of homeowners will stay in their homes. The amount of cancellations increased 3.5%, a smaller increase than the ForeclosureRadar analysts anticipated, given the amount of pressure servicers face to complete more modifications under the Home Affordable Modification Program (HAMP). Under HAMP, the US Treasury Department provides capped incentives to servicers for the modification of loans on the verge of foreclosure. According to the latest report from the Treasury, the servicers completed 30,000 permanent modifications through the month of November, sparking some, like Bank of America (BAC) who had only 98 permanent modifications, to shift a focus to collecting documents and converting more trials into permanent status. Based on the timing of the California cancellations, servicers canceled 21% of the foreclosures because of a required one-year delay before foreclosure sale. The majority, 61.9%, came from loan workouts, according to the report, either through HAMP modification, short sale or refinance, and it’s likely that the other 17.1% came from filing error. Echoing the report from Default Research, that said foreclosure filings fell across many counties in November, ForeclosureRadar reported a 32.5% drop in notices of default. But, delinquencies continue to plague the market. According to a report from another California real estate consulting firm, Foresight Analytics, delinquencies in Q309 grew 11% for first-lien residential mortgages. “The dramatic drop in foreclosure activity may have been a Christmas gift to homeowners,” says Sean O’Toole, CEO of ForeclosureRadar.com, “however, given rising mortgage delinquencies it is becoming increasingly clear that foreclosure activity no longer fully represents market realities.” Write to Jon Prior.