* Regulators say mortgage market firming
* Foreclosures are still high by historical standards (Adds byline, quote from OCC official, more data)
By Dave Clarke
WASHINGTON, June 29 (Reuters) - U.S. borrowers are making more timely mortgage payments, and the number of new foreclosures dropped sharply in the first quarter, according to a government report.
Tempering that bit of good news, however, are legal uncertainties that are complicating banks' abilities to clear out troubled mortgages.
During the quarter, 88.6 percent of U.S. mortgages were current, up from 87.6 percent in the previous period, according to a quarterly report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
New foreclosures fell 11.3 percent to 312,404 from the previous quarter.
"We are certainly seeing signs of firming in the mortgage markets," said Bruce Krueger, a mortgage official at the OCC. "There is definitely an improving trend in terms of delinquencies and foreclosures in process."
Krueger highlighted three reasons for the improved mortgage data: Servicers are modifying loans to make them more affordable, underwriting standards for new loans have improved, and completed foreclosures have cleared troubled borrowers from the system.
The total number of foreclosures being processed dipped less than 1 percent in the first quarter to 1.3 million.
But that figure is still up almost 8 percent from a year earlier.
Krueger said one reason for the high level of foreclosures in process is that servicers are looking at other options such as modifying loans so borrowers can stay in their homes.
The lending industry is also struggling to move through foreclosures because of allegations that banks such as Bank of America Corp (BAC.N) and JPMorgan Chase & Co (JPM.N) took illegal shortcuts in mortgage documentation.
A group of 50 state attorneys general and some federal agencies, including the Justice Department, are probing those mortgage servicing problems, which came to light last year.
In April, banks reached an agreement with the OCC and other regulators on the steps they will take to improve their foreclosure practices.
Wednesday's data reflect the back-and-forth over the servicing problem.
The report shows the number of completed foreclosures fell about 28 percent to 119,809 from a year earlier, but was up 26 percent from the fourth quarter.
This dramatic jump reflects the fact that in the final months of 2010 some big lenders, including Bank of America, briefly suspended foreclosure proceedings as they reviewed their methods for dealing with troubled borrowers.
The OCC and OTS survey covers 32.7 million loans with a combined $5.7 trillion in principal balances. These figures represent 63 percent of outstanding U.S. mortgages. (Reporting by Dave Clarke, Editing by Dave Zimmerman and Lisa Von Ahn)