Foreclosure activity saw a huge spike in the third quarter, as one in every 475 U.S. homes either received a default or auction sale notice, or was repossessed by a bank, according a report released yesterday (Thursday) by industry group RealtyTrac. It was a 71% jump over third quarter foreclosure activity in 2007 and a 3% increase from the second quarter of this year.

Foreclosure filings actually decreased 12% in September from August, but not due to an improving housing market.

“Much of the 12% decrease in September can be attributed to changes in state laws that have at least temporarily slowed down the pace at which lenders are moving forward with foreclosures,” said James J. Saccacio, chief executive officer of RealtyTrac, in the statement announcing the results.

A California law that requires lenders to give homeowners 30-days notice prior to filing a notice of default led to a 51% drop in that state.

The U.S. Treasury Department is working to implement a program that will modify the loan terms of struggling homeowners and guarantee those loans for banks that participate in the new program. The incentive for the government to stem the flood of foreclosures includes much more than just helping people hold onto their homes.

“We have never seen a foreclosure cycle like this one before,” Rick Sharga, RealtyTrac senior vice president, told CNNMoney.com.

A slowing economy generally precedes periods of elevated foreclosure rates. However, “in this cycle, we have foreclosure problems that have caused an economic downturn,” Sharga said.

Speaking in testimony before the Senate Banking Committee yesterday, Sheila Bair, head of the Federal Deposit Insurance Corp. (FDIC) and Neel Kashkari, head of the newly formed Office of Financial Stability, both spoke in favor of government assistance to homeowners facing foreclosure.

“We are passionate about doing everything we can to avoid preventable foreclosures,” Kashkari said.

Bair outlined how the government’s $700 billion bailout legislation includes provisions to help homeowners.

“Loan guarantees could be used as an incentive for servicers to modify loans,” Bair said in her prepared testimony, The Associated Press reported. “By doing so, unaffordable loans could be converted into loans that are sustainable over the long term.”

Bair pledged the FDIC’s support for the eventual Treasury Department plan.

Source: Treasury and FDIC Team Up to Aid Homeowners at Risk for Foreclosure