More Americans fell into foreclosure in July as a sour job market kept them from making payments, and banks took over homes at a near record pace.

Banks repossessed the second highest monthly number of homes ever last month, working through distressed loans already on their books rather than sharply stepping up new default notices, real estate data company RealtyTrac said on Thursday.

This reflects problem management instead of a fix of the root problem, said the company, which expects more than 1 million homes to be repossessed this year.

What's driving most of the foreclosure activity is unemployment and other types of economic displacement, RealtyTrac senior vice president Rick Sharga said in an interview.

Banks took over 92,858 properties in July, up 9 percent in the month and 6 percent in the year. This was a shade below the peak of 93,777 homes in May, the largest since RealtyTrac began tracking repossessions in April 2005.

In 2005, before the housing bust, banks took over just about 100,000 houses, according to the Irvine, California-based company.

Overall foreclosure activity, including notice of default, scheduled auction and repossession, rose 4 percent in July from June. Actions were taken on 325,229 properties, with one in every 397 housing units getting a foreclosure filing.

Repossessions coupled with the fact that we're still looking at 5 million seriously delinquent loans, many of which would normally already be in foreclosure, really suggests that what the banks are doing is managing inventory levels, said Sharga.

The Obama administration on Friday acknowledged it had underestimated the number of homeowners who fell seriously behind on mortgages even after getting government aid.

On Wednesday the Treasury Department expanded a program to help unemployed homeowners avoid foreclosure.

A measured flow of foreclosure sales keeps home prices from falling much more after plunging nearly 30 percent, on average, in four years, economists agree. Relatively tame single-digit price declines are now seen, with a flood of foreclosure sales at any one time seen unlikely.

One in four home sellers last month had cut prices at least once to entice buyers, real estate Website said on Wednesday.

We not only need unemployment to settle down, but we need job creation and consumer confidence improving, so that people that can buy will get back on market and start buying up the inventory of these assets, said Sharga.

Unemployment held at 9.5 percent in July but would have been higher if discouraged people had not left the workforce.

Overall foreclosure activity in July did drop about 10 percent from a year ago, but that was from the second highest level on record, RealtyTrac noted.

July was still the 17th straight month of foreclosure actions on more than 300,000 properties, the company said.

Declines in new default notices, which were down on a year-over-year basis for the sixth straight month in July, have been offset by near-record levels of bank repossessions, which increased on a year-over-year basis for the eighth straight month, RealtyTrac CEO James J. Saccacio said in a statement.

More than 97,100 houses got a default notice in July, 1 percent more than in June but 28 percent less than July 2009 and 32 percent below the record in April 2009.

Lenders worked on their existing problem mortgages. Along with repossessions, lenders set foreclosure auctions for the first time on 135,248 properties in July. That was up 2 percent from June, but down from a peak of 158,105 in March.

Five states had more than half of all foreclosure actions in July: California, Florida, Illinois, Michigan and Arizona. Nevada, Ohio, Georgia, Texas and Maryland were the other states with the 10 highest total foreclosure actions last month.

Nevada, Arizona and Florida and California had the highest state foreclosure rates. Nevada, hurt by overbuilding and speculation during the boom, had the highest foreclosure rate for the 43rd straight month. The other six states with the highest foreclosure rates were Idaho, Michigan, Utah, Illinois, Georgia and Maryland.

(Editing by Chizu Nomiyama)