Declining prices put many homeowners “underwater” on their mortgage loans, owing more than their homes are worth, which makes them more likely to default.  And adding a flood of bank-owned homes to already slow markets further outstrips demand and dampens prices, creating a spiral of lower prices and higher foreclosures.  As a result, more homeowners who fall behind on their mortgage payments end up losing their homes, according to Jay Brinkman, the chief economist for the Mortgage Bankers Association.  Foreclosure news seems to arise daily as foreclosure rates rose 81% in 2008.

In California and Florida 80% of the homeowners who miss a loan payment end up in foreclosure, according to the MBA. That’s a much, higher percentage than in the past.  “The number of mortgages 30 days past due are still below what they were during the 2001 recession,” said Brinkman. But the proportion of those loans that went into foreclosure was much lower, he added – about 10%.  “Delinquency itself has become a much clearer predictor of foreclosure,” said Sharga.  If home prices keep plunging, the foreclosure scourge will likely continue.  And S&P’s chief economist, David Wyss, expects home prices to continue to decline, bottoming in early 2010 roughly 33% below their 2006 peak.