There are many different things that happen, the most common situation i have run into when selling foreclosures are people who purchase within the last 3 years and got 80/20 loans, no money down and have nothing invested in the house so it is too easy to walk away. they paid too much, financed their closing costs and now the property is worth 1/2 to 2/3 of what they owe.

Peggy,
I think it is all the above but especially that people's eye's are bigger than their wallets! They want big- big- big and don't figure in the cost of utilities, repairs and maintenance etc!
They especially don't consider how much their property taxes can increase or that they may be reassessed. In addition recently many mortgage providers allowed people to finance way beyond their means!

From what I have read and seen first hand, it seems to be a combination of things including remortgaging/taking out a home equity line of credit and unusual expenses like medical bills. Home equity lines have adjustable interest and that has caused some problems but most of what I have seen in this area is that the homeowner got over extended and just can no longer meet the payments. The bank doesn't really want to foreclose and take the house back and may be willing to work out a short sale....meaning they will accept less than the amount owed on the mortgage as payment in full when the house is sold. The homeowner has to demonstrate to the bank that they have no resources to pay off the difference.