The only real reason for foreclosure is being upside down. The reason is that if one was not upside down (after selling costs) they could sell their home and not suffer the credit hit from foreclosure. (There are exceptions, but this is by a wide margin the only important reason for sane people).
Once price declines end and there is slight upward movement people have the option to sell rather than be foreclosed on. The pricing bottom (in terms of nominal pricing) occurred in ~ Dec 1995 – Jan 1996. Many people were still upside down at this point.
When prices started creeping up in spring 1996 the foreclosure pace naturally declined since some folks were moving closer to break even (less underwater).
That is why foreclosures peaked at the bottom in pricing.
