According to RealtyTrac, foreclosure filings set a new record in July as they rose 7% from June and are up 32% year over year.

According to James J. Saccacio, RealtyTrac's chief executive, "July marks the third time in the last five months where we've seen a new record set for foreclosure activity".

In other words, despite calls of a housing bottom by CNBC's Jim Cramer and even the AP, the housing market is still deteriorating and home values are still eroding.

This escalation of foreclosure activity also brings into question the effectiveness and long-term sustainability of the Obama Administration's $75 billion loan modification program which has under-performed due to weak participation by major banks, namely Bank of America and Wells Fargo. 

Ironically, both Bank of America and Wells Fargo have been hit by massive surges in the amount of non-performing loans during their recent quarterly earnings reports.  Wells Fargo showed a 45% increase in non-performing assets when compared to the first quarter.  Bank of America's non-performing assets jumped 21% from the first quarter.  

What all of this data points to is that foreclosures, in addition to driving down home values, are also continuing to put pressure on bank's balance sheets. 

Assuming that banks actually do participate in the loan modification process, and that remains to be seen, it is only a temporary stop-gap measure.  The greater systemic risk to the housing market is that home values are still falling and more homeowners are being plunged underwater.

Deutsche Bank is estimating that approximately half of all mortgages will be underwater by 2011.  

The solution is for a new fiscal policy, the reform of Tax Reform Act of 1986, that would stimulate sufficient demand for real estate to absorb the excess housing inventory that contninues to erode property values.