'Sand state' foreclosures are receding fast

• Fannie Mae is seeing many fewer mortgage loans go bad in California%2C Arizona
• Florida now accounts for 29%25 of Fannie%27s single-family home loan losses
• Ohio%2C Indiana%2C Illinois and Michigan are home to 22%25 of Fannie%27s losses

After years of being the USA's foreclosure laughingstocks, Arizona and California now have better credit than the rest of us.

That's from an analysis released last week by Fannie Mae, which chronicled the performance of its $2.8 trillion loan portfolio. In states hit hardest by the housing bust — Arizona, California, Nevada and Florida — Fannie Mae used to see loans go bad from one-and-a-half to an excruciating eight times as often as the national average. That's changing fast — except in Florida.

Only 7% of Fannie's 2013 credit losses come from California — home to nearly 20% of its loans and 27% of its 2011 writeoffs due to defaults and foreclosures. Arizona, with 2.4% of Fannie's outstanding balances, has seen its share of credit losses plunge to 1.8% in the first half of this year, from nearly 12% in 2011.

In each state, the share of local loans that wind up as Fannie's losses is now below the mortgage finance giant's national average.

Florida, by contrast, accounts for almost 29% of Fannie Mae's losses, up from 11% in 2011.

A few Midwestern states also look riskier. Fannie Mae now has 10% of its loans and 22% of its losses in Ohio, Illinois, Indiana and Michigan, which accounted for just 12% of losses in 2011.

The shift is caused mostly by two things: much longer foreclosure processes in states where courts approve them than where they don't, and the fact that prices are now rising very quickly in the so-called "sand states" of Arizona, California and Nevada. Nevada is still responsible for 4.3% of losses — down from almost 8% two years ago — and only 1% of loan balances.

A third, less important factor is that the sand states' economies are adding jobs faster than in the four Midwestern states that Fannie's data highlights.

Because Fannie Mae takes its credit losses when it completes the foreclosure on a bad loan and takes over the house, slower "judicial foreclosure" processes in states like Florida, Illinois, Ohio and Indiana mean losses there are just being taken now, said Svenja Gudell, senior economist at real-estate site Zillow.com. Foreclosures don't require court approval in Arizona and California.

For loans in Arizona and Florida that began to go bad in 2009, the 775-day difference between how long the states take to complete foreclosures on average means that in many cases homes in Arizona completed foreclosure by 2011 and the foreclosures in Florida are being completed this year, said Daren Blomquist, vice president of Realty Trac, a real-estate information firm.

"What we see is the pig moving through the python,'' he said.

House prices also play a role in how much Fannie loses on properties — and may influence how many new foreclosures happen, said Jed Kolko, chief economist at the real estate website Trulia. Nevada, Arizona and California have the three biggest percentage increases in home prices in the last year, Fannie says.

The average repossessed home Fannie sells in California fetches 85% of the unpaid loan balance, up from 64% in mid-2012 and far better than the 62% in Ohio and Illinois now. That cuts down Fannie's losses on resale. Tight inventories of homes for sale are pushing up prices in general, and slashing the discounts for foreclosed-upon homes, Gudell said.

The average short sale in Arizona commands 77% of the balance, eight points better than in Illinois.