QINGDAO, China >> Banks in China are foreclosing on a growing number of apartments after homeowners could not pay their mortgages, as the country’s housing crash threatens the financial system.

The roster of homes seized and listed for auction leaped 43% last year, according to official data. Numerous Chinese banks have disclosed increases in mortgage defaults during the first half of this year. The downward spiral in apartment prices has since accelerated.

The legal system is struggling to keep up with evictions. In some cities, like Qingdao, foreclosed apartments are being sold at auction before the occupants have moved out. The buyers must persuade them to leave, finance and foreclosure specialists said.

The increase in evictions and foreclosures piles onto pressures on China’s banks. They face other losses related to the real estate meltdown, including on loans to local governments, property companies in default and buyers of unfinished apartments that developers never delivered.

To make matters worse, corporate borrowers in China have long posted real estate holdings as collateral. Bank managers are finding that the collateral is worth much less than when the loans were extended.

The Chinese government is urging banks to lend more to real estate developers and other borrowers as part of its economic stimulus measures since late September. But the lenders themselves face difficulties.

China’s mostly state-owned banking system has plenty of money, earning over $600 billion a year in profits before setting aside reserves to cover losses on unpaid loans. That means the banks can slowly write off their losses against profits.

But China’s banks play a crucial role feeding revenue into the national government’s budget. The lenders pay income taxes, transaction taxes and dividends to the finance ministry equal to about 1% of China’s economy. Heavy losses would hit bank profits and government revenues.

In a country with 90 million empty apartments after a decades-long construction boom, however, the evictions do not seem to be causing homelessness. Many foreclosures involve second homes, often occupied by friends and relatives of the owner, and seldom involve the primary residences of families.

In addition to the rise in foreclosures, at least 7 million apartments sit unfinished across China. Analysts at UBS recently estimated that 4 million of these apartments were bought by Chinese households that took out about $350 billion worth of mortgages.

That works out to nearly 7% of all the mortgages on the balance sheets of China’s banks. Regulators have encouraged them not to foreclose on mortgages on unfinished apartments.