Foreclosure risk: Underwater homeowners are much more likely to lose their homes to foreclosure than borrowers with value remaining. That negative equity contributes to foreclosures is supported by Zillow’s statistics on foreclosure sales.

via More homes worth less than mortgage – Zillow report – May. 6, 2009 .

It can’t be repeated enough.   The number one cause of foreclosure is negative equity.  An owner who is in trouble, will sell their home if they have equity.  If they do not have equity it goes to foreclosure.

Products contribute to this, but they are not the proximate cause. Lack of equity is the cause.  Particularly the much criticized ARM loan.  The majority of defaults come within the first year, the majority of ARM defaults occur before the first adjustment.  With index rates low, most recent adjustments have been downward.