The number of foreclosure filings in March fell to the lowest level since July 2007, according to a report from RealtyTrac, released on Thursday.

Filings, which include default notices, scheduled auctions and bank repossessions, dropped 4 percent, compared with February, the company said. They fell 17 percent compared with a year ago.

Foreclosure activity, as measured by the number of homes receiving foreclosure-related notices, slowed sharply in the fall of 2010 when claims surfaced that some banks and mortgage servicers were processing foreclosures without verifying documents.

"We’re not out of the woods yet with foreclosures," said Daren Blomquist, a vice president at RealtyTrac. "There are more batches of foreclosures coming through the pipeline."

A $25 billion settlement reached in February between the biggest U.S. mortgage lenders and state officials has paved the way for banks to take action on unpaid mortgages, many of which have been in a procedural limbo for months or years. And it’s those homes that could ultimately be foreclosed-upon and end up back on the market.

Foreclosures typically sell at a discount to other homes and can drag down the value of neighboring properties, so the prospect of more foreclosures means it could take longer for home prices in some areas to bounce back.

The U.S. housing market remains weak, even after the best winter for home sales in five years and steady improvement in the job market. Home prices are now back to 2002 levels, according to the Standard & Poor’s/Case-Shiller U.S. home price index.

Rather than a large wave of bank-owned homes crashing onto the market at once, it’s likely the new crop of foreclosures will arrive in smaller waves throughout the year, Blomquist said.

Still, many of the homes entering the foreclosure process now are properties with loans that have gone unpaid for a long time, not instances of borrowers just starting to fall behind. That suggests the possibility that the number of homes at risk of foreclosure could begin to taper off once banks tackle the crop of homes with long-overdue mortgage payments.

"The faster we can move some of these old foreclosures through the pipeline, the faster the market can be in a place to recover," Blomquist said.

At the end of last year, some 1.5 million U.S. homes had mortgages that had gone unpaid at least 90 days, according to Mortgage Bankers Association data.

First-time foreclosure notices, such as warnings of initial default, are the first step in the process that can potentially result in a home being foreclosed upon. Homes can exit the process if the overdue payments are paid. Sometimes, a bank will allow that the home be sold for less than what the borrower owes on their mortgage, a so-called short sale.

All told, 101,939 U.S. homes received a first-time notice in March, the biggest monthly increase since October, RealtyTrac said.

Thirty-one states posted a monthly increase in homes with a first-time foreclosure notice. Nevada led the pack with an increase of 153 percent.

Banks took back 55,075 homes in March, down 14 percent from the previous month, and down 25 percent from March 2011.

RealtyTrac expects banks will repossess close to 1 million homes this year. Last year, lenders took back 804,000 homes.

For the first three months of this year, foreclosure activity fell 2 percent compared to the last quarter of 2011 and was down 16 percent from the first quarter of last year, the firm said.