Foreclosures in Minnesota and the rest of the nation dropped sharply in the third quarter from a year earlier -- fanning hopes the nation's housing disaster could be starting to unwind.

Data that research firm RealtyTrac released Thursday showed 6,946 Minnesota homes were targeted for foreclosure from July through September, down 27 percent from a year earlier. Nationwide, foreclosure activity was down 34 percent.

But while some said the numbers could be taken as evidence the market is mending, albeit very slowly, RealtyTrac cautioned that much of the improvement could result from temporary factors. For one, criticism over rushed paperwork has led lenders to move more slowly on foreclosures.

"U.S. foreclosure activity has been mired down since October of last year, when the robo-signing controversy sparked a flurry of investigations into lender foreclosure procedures and paperwork," RealtyTrac's CEO James Saccacio said in the company's release Thursday.

Saccacio said there is evidence the "temporary downward trend is about to change direction."

Others were more optimistic, though still pointing out that foreclosures will remain an issue for the foreseeable future.

"The trend at this point should be a slow -- and I do emphasize slow -- decrease in the number of foreclosures that we see in Minnesota," said Ed Nelson, spokesman for St. Paul-based Minnesota Home Ownership Center, a nonprofit doing foreclosure prevention counseling.

RealtyTrac zeroed in on the fact that nationally, foreclosure activity in the third quarter blipped up 0.4 percent from the previous quarter -- the first such quarter-to-quarter increase in a year.

The increase was driven by a 14 percent leap in new default notices, the first step in the foreclosure process. Saccacio interpreted this as "cautiously throwing more wood into the foreclosure fireplace after spending months trying to clear the chimney of sloppily filed foreclosures."

Small as it is, the uptick "indicates a little bit of a shift," the company said.

"We're coming out of an artificial low and we're going to just bump up," RealtyTrac spokesman Daren Blomquist said in an interview.

"I think Minnesota will follow what we're seeing in other parts of the country."

In Minnesota, foreclosure activity fell 15 percent from the second quarter to the third.

The state ranked No. 23 in foreclosure activity in the third quarter, according to RealtyTrac, with one in every 336 housing units in some stage of the foreclosure process.

RealtyTrac counts a variety of filings, from notices of default to notices of sheriff's sales to houses taken back by lenders and held in inventory for resale.

Housing market improves

The declines RealtyTrac reported for Minnesota jibe with a different report in August. That report, by Minneapolis nonprofit HousingLink, said the number of statewide foreclosures fell 14 percent in the first half of the year from the first half of 2010.

But HousingLink also noted that statewide foreclosures have been ticking up recently.

The drop in foreclosures comes amid flickers of life in the hard-hit Twin Cities housing market. The area's home sales have increased three months in a row.

Sales last month were up 26 percent from a year ago, with pending sales up nearly 40 percent.

Still, at $155,000 in September, the median sale price was down almost 7 percent.

Seeing a brighter outlook

Not everybody agrees with RealtyTrac's assessment that a shift is afoot and foreclosures will necessarily rise again in Minnesota.

Nelson, the Minnesota Home Ownership Center spokesman, said RealtyTrac may be oversimplifying things. He said he doesn't expect a new long-term wave of home losses.

"I would be hesitant to try to extrapolate where we're heading with foreclosures based on one quarter of activity," Nelson said.

Numbers from the Mortgage Bankers Association show delinquencies on mortgage loans -- an indicator of future foreclosure activity -- declining in Minnesota, said John Patterson, director of research and evaluation for the Minnesota Housing Finance Agency.

"I don't see the evidence that it's going to come back in a big way," Patterson said, adding that the situation would clearly change if the country suffers a double-dip recession and unemployment rises.

Jennifer Bjorhus • 612-673-4683