But mortgages work a bit differently than car loans, at least in some places.
When it comes to mortgages, California is one of twelve “non-recourse” states. This means that, in California, in most circumstances you can walk away from your mortgage, and all the lending institution can do is take the house. If the house is worth less than what you owe them on the mortgage, the bank basically eats the loss. There were a bunch of people doing this during the mortgage crisis ten years ago.
So, say someone buys a house for $600,000 and the following year the market collapses, leaving the house worth 300,000. The person might still owe the bank all $600K, but if they live in a non-recourse state, they can basically give the keys back to the bank and walk away.
In the other 38 “recourse” states, banks can come after you for the shortfall. They could sue you for the $300K difference between what you owe them and what the house is worth. They don’t always pursue this, because people who default on their mortgage often don’t have much to go after, but there are some circumstances where people default on their mortgage and still have other assets that can be taken.
What I’m not sure about, though, is how the “non-recourse” rule would apply to a situation where your “house” is worth almost nothing because it has been burned to the ground. As Riemann has noted, almost every institution that provides a mortgage also requires some sort of insurance policy on the property, but I wonder what would happen in a case where a homeowner, for whatever reason, had no coverage for their house and it was destroyed by fire. Does the “non-recourse” rule require the house itself to be standing and in good condition? I don’t know. I’d be interested to see how a situation like this works.