A huge supply of REO homes are set for sale in 2012.

Banks are readying more than one million foreclosed properties for the real estate market in 2012, according to a new study by Moody’s Analytics.

The sales will come amidst a turbulent foreclosure landscape. Prices for the 1.25 million REO properties set for the auction block declined by as much as 10 percent during the mortgage settlement talks, according to RealtyTrac, and LPS found that in February, 43 percent of foreclosures had been delinquent for two years or more, an increase from 21 percent in 2010.

In a Business Week article on the pending sales, Todd Sherer, who manages distressed mortgage investments for a hedge fund, said banks are trying to unload their REOs before they lose additional value.

“The longer a foreclosed home is in the mill, the bigger the losses,” Sherer said. “We have a bulge of these properties coming through the system.”

Dean Baker, an economist and co-director of the Center for Economic and Policy Research in Washington, said those losses can be extreme.

“You can easily strip $100,000 or more off the value of a property by letting it sit in foreclosure for an extended period of time,” Baker said. “You’ve got to fill that home as quickly as possible.”

Such reductions in price can also have wide-ranging impacts. Karl Case, one of the creators of the hugely influential Case-Shiller Home Price Index, said a surge of cheap foreclosures (the Federal Reserve Bank of Cleveland reported last month said REOs that sit for two years can lose up to 60 percent of their value) can negatively impact prices in the residential markets, even with increased building activity.

Interestingly, as REO transactions have increased, foreclosure rates have fallen, according to the latest report from CoreLogic. The firm’s National Foreclosure Report for February showed that the number of homes with mortgages in the foreclosure inventory dropped from 3.6 percent to 3.4 percent, or 1.4 million properties. The number of buyers in foreclosure also dropped, with a year-over-year decline of 7.6 percent.

Also, perhaps most encouragingly, the number of homes ending up in foreclosure also declined in February, and CoreLogic anticipates to drop further as the Spring home buying season hits its stride. Completed foreclosures declined from 71,000 in January to 65,000 in February.