How does negative equity lead to foreclosure? Make the payments long enough/values recover and you won't be underwater.
I think the danger of foreclosure comes into play if a person should lose their job, or have their wage reduced. In the past, you could refinance, maybe take a longer term, and find a way to make the payments even through financial difficulties in your earnings.
If you’re underwater, nothing you can do to refinance. You owe 200,000 and the house is worth 150,000...no banks going to help you out, so you’re stuck. True, as long as you have your same job, and can afford the payment, there’s not a problem (I know many young couples in that situation...they are making the payments even though they don’t see themselves recovering the “lost” equity for at least 10 years.) But any flux in your earning ability and it’s either a short sale or foreclosure.
But if they are in default, re-financing might not become possible or if they are out of a job.