How did falling home prices affect the housing crisis?

Question

how did it affect forecloses or people just not being able to pay bills anymore?

Answer 1

It is part of a positive feedback loop.

http://en.wikipedia.org/wiki/Feedback

The crisis started when interest rates went up and people who could barely afford their mortgage at the old rates couldn't afford them at the new ones. That meant that the banks had a choice of not getting any money at all, or foreclosing, selling the houses, and getting their money back.

But these first failures were the houses that were mortgaged to the hilt. The banks couldn't get all their money bank even if they sold. That meant the banks were losing money.

So things gradually get worse, more people can't pay and more homes go on the market. This puts more houses on the market and the expectations of more to come, so prices fall. That means that when the banks try to sell, they recover even less of their loans. So the banks get into more and more trouble.

As they get into more trouble, they are less able to offer new mortgages. So even though they want to sell their houses, fewer people can buy them because fewer people can get mortgages, so prices keep going down.

So, while falling house prices were inevitable and not the cause of the crisis, they certainly made things worse for the banks and all the other institutions that bought the securitized mortgages.

Answer 2

There were a number of people who mortgaged there house for close to the value at that time.  They gambled that mortgage rates would decline or that at least they would be able to refinance to a fixed rate mortgage if the rates rose.  With the decline in housing prices they no longer had sufficient equity in the house to borrow enough money to repay their existing mortgage.  With the rising interest rates many people found they were no longer able to pay what they owed on their adjusted rate mortgage.  There was a complex set of events that resulted in the large foreclosure rate.  The declining value of homes is just one of the factors.  The failure of regulators in their job to stop the banks from making too many risky loans is an even more important factor.