Mortgage Daily's Fourth Quarter 2012 Litigation Index indicates that while litigation activity in the mortgage industry has been declining, there are signs that it could remain above historic levels as foreclosure, investor, and regulatory litigation persists.

The index shows that there were 934 reported cases of litigation in 2012, a 15 percent increase over 2011, but that litigation numbers declined in both the third and fourth quarters of this year. There were 223 cases reported in the fourth quarter, about 5 percent fewer than the preceding quarter and 15 percent fewer than the record 264 cases in the second quarter of 2012.

Ballard Spahr partner Christopher J. Willis, who wrote a white paper analyzing the litigation index, said that although the total number is gradually decreasing, the current magnitude of mortgage litigation is still higher than any of the numbers between 2007, when the index began, and the third quarter of 2011. He said the six highest total litigation numbers in the index were recorded in the last six quarterly periods.

Mr. Willis said that it is tempting to link the decrease in overall litigation numbers with the decline in foreclosures and mortgage delinquencies. However, the “foreclosure” category in the index, which represents more than half of the cases reported, increased by nearly 30 percent in 2012 compared with 2011.

"The data suggests that foreclosure activity is converting into litigation at a higher rate than previously existed, and we suspect that the accumulated weight of continued publicity, governmental enforcement actions, and evolving theories of liability for mortgage servicers are all contributing to this trend," Mr. Willis wrote in the paper. "This means that, even though mortgage delinquencies and foreclosure numbers are moving in a lower direction, the level of foreclosure- and delinquency-spawned litigation may continue to persist at its current high levels."

The index also reported that cases involving loan modifications were the highest in seven quarters, and investor litigation was at a five-quarter high. Mr. Willis said he sees no return to a normal level of mortgage litigation for the foreseeable future.