The nation’s shadow inventory is lessening, a positive sign for sellers in the real estate market, an industry trade group said.

The Mortgage Bankers Association noted in a Thursday report that a four-year low in serious mortgage delinquencies and a drop in the percentage of loans in foreclosure for the third quarter suggests fewer homes are part of the shadow inventory that’s always threatening prices and creating market uncertainty.

The overall foreclosure inventory rate fell 20-basis-points in the third quarter, which is the largest quarterly drop in the survey’s history. Still, the inventory level is four-times the normal average with foreclosure backlogs still lingering in judicial foreclosure states and jurisdictions with initiatives slowing the default process.

The delinquency rate for mortgages on one-to-four unit homes declined seasonally to a rate of 7.40% of all loans outstanding in the third quarter. That’s down 18-basis points from the second quarter and a decline of 59-basis points from year ago levels, the MBA said.

The delinquency rate accounts for loans that are at least one payment behind, while discounting mortgages already in the foreclosure process.

Foreclosure actions started in the third quarter made up 0.90% of the nation’s outstanding loan pool, down six basis points from the second quarter and an 18-basis point drop from last year.

About 4.07% of loans were actually in the foreclosure process at the end of the quarter—a steep 20 basis point drop from the second quarter and down 36 basis points from 3Q 2011.

Meanwhile, the serious delinquency rate on loans 90 or more days past due hit 7.03%, a decline of 28 basis points from the last quarter and an 86 basis point drop from last year.

When looking at the percentage of loans in foreclosure in hardest-hit states like Arizona and California, it’s clear a recovery is underway. The third-quarter foreclosure rate for Arizona is down 73 basis points from 2Q while California’s rate fell 44 basis points.  In the other so-called sand state of Florida, the percentage of loans in foreclosure during the third-quarter fell 66-basis points from the previous survey period.

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