Still, while banks foreclosed on more homes, the total number of filings has continued to fall, a sign that the foreclosure crisis might have peaked. Last month, 325,000 homes received a notice of default, auction or repossession — up 4 percent from June and down 10 percent from 2009.

All in all, it has been a horrible day in economic news, and housing news especially. Another report from Moody’s Analytics says the chance of a double dip — a return to technical recession, with the economy contracting rather than growing — has risen from 20 percent to 25 percent. Moody’s says that another drop in home values might catalyze a broader downturn, as economic growth is already slowing. During a double dip, home prices might fall a further 20 percent. They are already about 30 percent off their peak — more than 50 percent in Nevada.

All in all, 1.6 million properties received some form of foreclosure notice between January and June. Nevertheless, the report shows that foreclosures seem to have peaked and stabilized, at least for now. The number of foreclosure notices dropped between the last half of 2009 and the first half of 2010. And foreclosure filings have declined in recent months as well.

Still, RealtyTrac warned about continued, severe problems in housing. “The midyear numbers put us on pace to exceed 3 million properties with foreclosure filings by the end of the year, and more than 1 million bank repossessions,” James Saccacio, the head of RealtyTrac, said in a release. “The roller coaster pattern of foreclosure activity over the past 12 months demonstrates that while the foreclosure problem is being managed on the surface, a massive number of distressed properties and underwater loans continues to sit just below the surface, threatening the fragile stability of the housing market.”

Notably, foreclosure tracks closely with unemployment, and the two feed into one another. Regions with higher rates of joblessness have more families that cannot afford their mortgages. Regions with more homes in foreclosure have more families that cannot move to find work.

“The numbers in May continued and confirmed the trends we noticed in April: overall foreclosure activity leveling off while lenders work through the backlog of distressed properties that have built up over the past 20 months,” said James J. Saccacio, chief executive officer of RealtyTrac. “Defaults and scheduled auctions combined increased by 28 percent from 2007 to 2008 and another 32 percent from 2008 to 2009 — creating a build-up of delayed bank repossessions. Lenders appear to be ramping up the pace of completing those forestalled foreclosures even while the inflow of delinquencies into the foreclosure process has slowed.”

And lenders “ramping up” the pace of foreclosure pushed bank repossession to an all-time high. Last month, banks and other lenders took control of 93,777 homes, 44 percent more than they did in May 2009. But a RealtyTrac expert warned that the new peak in repossessions does not signal that banks believe that the housing crisis has bottomed out. (Banks have little incentive to repossess homes if they think the housing market is declining. Why flood the market with new properties, furthering the decline in home values?) Instead, banks are working through the current backlog, rather than upping new foreclosures: “What it looks like is that the lenders are focusing on processing the delinquent loans they already have rather than initiating new foreclosures,” Rick Sharga told CNBC. “They’re managing inventory to prevent a free fall in home prices.”

The crisis remains localized; 10 states have 70 percent of the foreclosures. But there was good news for the places suffering from the highest foreclosure rates:

[All but one metro area] in the top 10 [for foreclosure rates showed] declining foreclosure activity on a year-over-year basis: No. 1 Las Vegas was down nearly 18 percent; No. 2 Merced, Calif., was down 7 percent; No. 3 Modesto, Calif., was down nearly 28 percent; No. 5 Cape Coral-Fort Myers, Fla., was down nearly 19 percent; No. 6 Stockton, Calif., was down 33 percent; No. 7 Riverside-San Bernardino-Ontario, Calif., was down nearly 29 percent; No. 8 Bakersfield, Calif., was down 19 percent; No. 9 Reno-Sparks, Nev., was down nearly 18 percent; and No. 10 Phoenix was down nearly 9 percent.

What would force the foreclosure rates back up? Declining home values, caused by slack demand due to sustained high unemployment and the sunset of the Obama administration’s interventions into the housing market, including the homebuyer’s tax credit.

The troubles continued to be felt most acutely in the so-called “sand states”: California, Nevada, Arizona, and Florida. In California alone 216,263 properties received a foreclosure notice. Ten states accounted for more than 70 percent of foreclosure activity, RealtyTrac said.

Why the sudden spike, so many months since the start of the burst of the housing bubble? The underpinning reason, of course, is persistent joblessness, declining incomes, and declining real estate prices. President Obama’s emergency foreclosure plans –  including the Home Affordable Modification Program, or HAMP, under scrutiny this week — have delayed much foreclosure activity, but not changed the underlying fundamentals.

The more immediate reason is that banks have decided to take action against homeowners late on their payments, both for mortgages and home-equity loans (secondary loans taken against the value of a house). The subprime mess remains a multibillion-dollar liability on the banks’ books. Reporting earnings yesterday, J.P. Morgan, the massive investment bank, for instance, wrote down $1.1 billion in home-equity losses. Lenders with more immediate exposure to mortgages — such as Bank of America — have much more to lose. And a recent report from CreditSights, a research firm, said that Bank of America, Wells Fargo, and J.P. Morgan might need an additional $30 billion to cover home-equity losses alone.

Citing data from RealtyTrac, an online foreclosure database, Bloomberg said the rising number of notices shows how job losses and falling property values are making the housing crisis even more severe.

More than 1.5 million properties received a default or auction notice or were seized by banks in the six months through June, the Irvine, California-based seller of default data said today in a statement. That’s a 15 percent increase from the year earlier. One in 84 U.S. households received a filing.

“People are losing their jobs, seeing their income go down and are underwater on their mortgage,” Richard Green, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles, said in an interview. “It’s a toxic combination.”

The foreclosure jump even prompted RealtyTrac CEO Joseph Saccacio to echo TWI’s story on Monday, and call for a new strategy to tackle the crisis.

Stemming the tide of foreclosures is a critical component to stabilizing the housing market, so it is imperative that the lending industry and the government work in tandem to find new approaches to address this issue.

The Wall Street Journal, in the meantime, takes a look at servicers trying to do loan modifications, and offers a glimpse into why so few loans are getting reworked. The story profiles the troubles of Morgan Stanley’s mortgage loan servicing firm, Saxon Mortgage Services Inc., which has been slower than most servicers to get loan modifications off the ground.

Part of the problem at Saxon is that it didn’t ramp up its ability to modify loans as early as other servicing companies. A spokeswoman for Saxon says that when Morgan Stanley purchased the company in 2006, it lacked enough employees and systems to undertake massive numbers of modifications. It wasn’t until the spring of 2007 — after its portfolio of subprime loans had already started to sour — that Saxon began to focus on modifying loans. Not until the fourth quarter of 2008 did Saxon boost its capacity to handle a large flood of requests.

All this takes its toll, not just by increasing foreclosures but by adding to the woes of already troubled borrowers. The story profiles Steve Applegate, owner of a Lake Mary, Fla., building-supplies business. Hurt by the construction downturn, Mr. Applegate last fall asked Saxon to modify his $750,000 home loan.

Mr. Applegate, a 60-year-old father of two, says he was told in January that he’d been approved for a rate cut to 2.08% from 6.5%, which would cut his $4,063 monthly payment by more than half. But the confirming paperwork from Saxon never arrived, he says, and in March, he was notified he was in default. When he phoned Saxon, a different loan negotiator recommended foreclosure.

He tried to resuscitate the earlier modification. At one point in April, he spent nearly two hours on the phone with Saxon, got disconnected twice, and was routed to four individuals, according to a recording of the call.

In May, Mr. Applegate was informed by Saxon that he had approval under HAMP for a modification starting June 1.

The good news didn’t last. When he tried to make a second payment on the modified loan, he was told he hadn’t qualified after all. When the Journal asked what happened, a Saxon spokeswoman said that the company had erred in sending him paperwork for a HAMP modification because his outstanding loan balance exceeded the program’s limit of $729,750.

Earlier this month, Saxon said it would modify his loan outside the federal program. Mr. Applegate is still waiting.

If you want to know why foreclosures seem unstoppable, there’s one reason. And the more foreclosures there are, the more dramatic the domino effect. Foreclosures drive down home values for everyone else, forcing more people into negative equity situations, which can lead them to quit paying on their loans, which means more foreclosures. And the cycle repeats itself.

Foreclosures that are delayed don’t just go away; they resurface eventually. Borrowers like Steve Applegate sit in limbo, hoping to avoid a foreclosure that may be inevitable. How many more loans are in the pipeline, just like his? How much longer will the lending industry and Washington wait before heading this off? Time is not on their side, and each month that brings fresh evidence of record high foreclosures only proves that point.

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And that’s not even the worst of it. RealtyTrac Vice President Rick Sharga told CNN Money the continuing high levels of foreclosures are altering the firm’s earlier predictions on the severity of the crisis.

“We had been predicting 3.4 million filings for the year,” he said, “but we’ll blow those numbers out of the water.”

As TWI reported last month, mortgage giants Fannie Mae and Freddie Mac ended their foreclosure moratorium on March 31, which added to the foreclosure spike.

CNN reports that the continuing free fall in housing prices is also contributing.

The loss of home values put many more mortgage borrowers underwater, meaning they owe more on their loans than their homes are worth. That increases foreclosure rates in two ways: Underwater borrowers have no home equity to draw on should to pay for unexpected expenses such as big medical bills or major car or home repairs. That’s makes them more likely to miss payments. And when home values fall far below mortgage balances, homeowners often walk away from their loans.

“There has been much more ‘deed-in-lieu-of foreclosure’ activity lately,” said Sharga. This is a transaction in which borrowers simply tell their banks that they’re not going to pay their mortgage and hand back their keys, and deeds, to their lenders.

“People are making the rational financial decision to walk away from underwater homes,” he said.

It’s not just subprime borrowers who are losing their homes in record numbers anymore; the crisis increasingly is affecting borrowers with prime loans who have lost their jobs or who have seen their home values tank.

Given all this, don’t expect May’s numbers to improve much. As we’ve noted before, nothing seems to stop the foreclosure machine — and today’s news suggests the problem will likely continue to get worse before it gets better.

Just to review, here’s the situation: Banks are sitting on hundreds of thousands of  vacant and vandalized properties scarring neighborhoods around the country — houses the banks foreclosed on, but didn’t sell at sheriff’s auctions or foreclosure sales. Those properties are known as REOs, or real estate owned homes.

Usually, banks unload those properties as quickly as they can, taking their losses and to avoid being in the property management business. But these are not normal times. Some 1.5 million REOs are expected to come down the pike this year. And to make things worse, as RealtyTrac vice president Rick Sharga pointed out, banks are sitting on some 700,00 properties that they’ve foreclosed on – but haven’t even yet listed as REOs.

Why would they do this? As TWI explained, some banks are sitting on distressed properties as they wait to see what the government’s next move might be, and what kind of deal they might get for their foreclosed houses. Some are hoping for a “bad bank” to come along and buy up all their toxic mortgage assets. Others don’t want to record losses yet on their foreclosures by listing them as REOs, because, as one economist told me, “they want to keep the paper active,” possibility  to borrow against it for more TARP bailout money.

The reason all this matters is that vacant homes go south quickly – stripped, vandalized, and turned into a neighborhood eyesore or a den for drug dealers. The houses drag down property values for everyone else, and further tax cities and states burdened with cleaning them up. And there are so many that they’ve overwhelmed the resources of local community development groups.

The government has kicked in $4 billion to fix up and sell foreclosed homes, with $2 billion in additional money coming soon from stimulus funds. But it’s barely enough to address the problems in just Chicago alone, so imagine small the impact will be nationwide.

If you’re looking for a scandal, here it is. Some banks hire property managers to care for these houses, but many don’t. So: Banks taking government bailout money sit on distressed and deteriorated homes in already hard-hit neighborhoods — making the foreclosure crisis  even worse. And the government so far has failed to attach any conditions on banks that receiving bailout money that would require them to clean up their neglected REO inventories.

In cities like Cleveland, the REOs have become a bigger problem than new foreclosures themselves. In other cities, decades of hard work to draw investment and development to once-marginal neighborhoods is being undermined by so many bank-owned vacancies.

No doubt $165 million in bonuses to a failed company merit public outrage. But there’s another side entirely to the foreclosure crisis, one that hasn’t sparked the derision it surely deserves, because it’s localized, and mostly unseen in communities that aren’t suffering as much.

But it’s growing, right along with the anger of the people who live in neighborhoods devastated by abandoned REOs. And when it finally gets too severe to ignore, expect the same response of surprise and shock that accompanied the AIG disclosures. That’s how those in power justify failing to act in the face of problems they should have recognized, long before they became a crisis.