Foreclosures spiked dramatically across the Valley last year as sliding home prices plagued neighborhoods and homeowners fell behind on rising mortgage payments. And no relief is in sight.

Read Misty Williams' real estate blog

In the first few weeks of January, the number of properties entering foreclosure shot past the number of Valley home sales during the same period. About 4,000 properties entered the foreclosure process, and nearly 1,600 others were actually foreclosed on, compared with roughly 2,600 sales of new and existing homes, according to research data firm Information Market. It’s not a pretty picture, said Tom Ruff, a partner at the Glendale-based company.

“You have declining prices,” he said. “That’s what’s causing it. No equity, no options.” Ruff estimates the Valley could see from 6,000 to 7,000 foreclosures in the first three months of the year. And the inventory of pending foreclosures could rise to 25,000, up from today’s roughly 14,500.

PROBLEMS AHEAD

Falling home prices have left borrowers across the nation owing more than their homes are worth, eliminating refinancing as an escape route from financial distress. The odds of a quick sale are slim with more than 55,000 homes on the market in the Valley.

Meanwhile, people’s monthly payments are shooting upward by hundreds of dollars, following loans reset to higher interest rates. In 2005 and 2006, Valley homebuyers took out 244,839 mortgages, 36 percent of which had adjustable rates, according to economic consulting firm Elliott D. Pollack & Co. Nationwide, an estimated $680 billion in adjustablerate loans are scheduled to reset this year.

“The data is pointing to things getting worse before it gets better,” said Jim Rounds, senior vice president of the Scottsdale-based company. In the past, relatively few homes that entered foreclosure proceedings were actually foreclosed on, Rounds said. Today, only 20 percent of homes that enter the process are being rescued from foreclosure, he said.

Then there’s the massive oversupply of homes for sale, which could take three to five years to work off with a potential 10 percent further drop in home prices and more job losses to come in the local construction industry, he said.

The slowing national economy is also a wild card.

Still, the Valley hasn’t seen a change in its underlying fundamentals, Rounds said. Population growth is projected at 2.5 percent to 3 percent, he said.

“The future is still bright, but we have to work through the pains,” he said.

STRICTER STANDARDS

During the boom, anyone with a pulse could get a loan, said Warren Potter, senior loan officer with Indymac Bank.

“Obviously, that was a recipe for disaster,” Potter said.

People were taking out second mortgages on their homes like they were ATMs, he said.

Today, a once-aggressive lending industry is tightening guidelines on a near-daily basis. Borrowers need proof of income, a higher credit score and a larger down payment.

Subprime loans, designed for higher-risk borrowers, are now virtually gone, he said.

Experts say the stricter standards have diminished an already limited buying pool. And hesitant buyers continue to wait and see if prices keep dropping, despite historically low interest rates and huge price cuts on properties.

Many are also watching what’s going to happen in the larger economy, Potter said.

“If you don’t know if you’re going to be laid off next week, you’re probably not going to be interested in buying a house no matter what the price,” he said.

‘ODD MAN OUT’

For local appraiser George Easton, walking into a foreclosed home can be a depressing experience.

It’s obvious that a lot of love went into taking care of these homes, said Easton, owner of Advantage Appraisals in Queen Creek.

“You see the rooms are decorated for the kids,” he said.

Experts say pockets of foreclosed homes — many of them originally purchased by out-of-state investors — are driving down values in some areas.

When times were good, there may have been one foreclosure in the comparable properties used for an appraisal, Easton said.

Now it’s the opposite. The nicely upgraded home is the “odd man out,” he said.

It’s tough to quantify the impact of foreclosures on surrounding homes because every neighborhood is different, but outlying areas, such as Queen Creek and Casa Grande, have taken larger hits, Easton said.

An unprecedented wave of first-time buyers jumped into high-risk loans during the boom, and many bought in more affordable outlying areas, said Rick Sharga, vice president of marketing at research firm RealtyTrac.

The good news is that the last batch of subprime loans should finish resetting by May or June, he said.

The market will turn, Sharga added, when people see low prices and interest rates and realize it’s a good time to buy.

GETTING HELP

More foreclosures may loom on the horizon, but there’s hope for some homeowners.

A rising number of delinquent borrowers are walking into counseling agency GreenPath Debt Solutions, which has an office in Tempe, regional manager Bill Druliner said.

Druliner said counselors talk to homeowners about the implications of keeping a home or letting it go into foreclosure.

For some, the stress is too much, so they walk away from the home, he said.

But lenders seem more willing to work with struggling borrowers now, he said.

In recent months, a number of major lenders have agreed to freeze interest rates or put borrowers into fixedrate products when possible.

The mortgage industry helped 370,000 homeowners in the second half of 2007 —including 250,000 repayment plans and 120,000 loan modifications, according to a study by Hope

Now, a partnership between counselors and the mortgage industry.

People are asking themselves, “Do I ride this out and hope the market rebounds, or do I move on, give up and rent?” Druliner said.

Companies may be more apt to work with people, but there is a fundamental breakdown between lenders and borrowers, RealtyTrac’s Sharga said.

Borrowers are often afraid to call their lenders or are in denial, Sharga said.

“There are thousands and thousands of people who will probably lose their homes this year who didn’t have to,” he said.