The "way it works" is that the bank writes off the difference between what the property brings at sale/auction and the mortgage owed. For the bank to be able to "write off the loss", he in effect 1099s the mortgagee for the difference.. and the defaulting mortgagee has to pay taxes on it like it was "income received". There is legislation proposed which would allow certain mortgagees to NOT be "1099-ed" for the differential. Should that pass, however, somebody else pays for it. Can you guess who? BTW... debt always, ALWAYS, gets accounted for by SOMEBODY... And under current U.S. Economic Facism, the wrong person(s) often unfairly pay for the greed and mistakes of others.
http://www.mortgagereliefformula.com/recourse/ Going after someone who doesn't have any assets isnt going to get the lenders anywhere - that will just rack up the legal fees.
If the defaulting mortgagee has other assets, the lender can strive to collect. If there are no assets, the defaulter gets "1099-ed", then has to deal with the IRS for income tax due. Bankruptcy would be the only true relief.
Read the linked article again ... you seemed to have missed the concept of the two different foreclosures. http://en.wikipedia.org/wiki/Nonrecourse_debt http://www.realestateinvestingtax.com/shortsale.shtml
it already passed. Mortgage Forgiveness Debt Relief Act of 2007 H.R. 3648 would amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income. http://www.washingtonwatch.com/bills/show/110_PL_110-142.html
Another important fact to remember, ONLY the Clinton's get full "no recourse" loans (from Madison Guarantee S&L for $300,000) - never a payment made and never a ding to the credit report!!!