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Further sticking with houses, if the officially appraised value of that house drops 40% since the said mortgage was issued, and comp sales in that neighborhood are 50% lower, the house's real value is nowhere near $500K, no matter what the formula says.

You'd still owe $300K in mortgage, and be out $200K of cash, but that doesn't mean the house is worth $500K.

P.S. And what's up with downvoting?

But no one is going to spend $200k for a $300k mortgage if the house's value is significantly less than $500k. The price you would be willing to pay is basically the house's value minus the outstanding mortgage.


Well, it could decline in value after you buy it. The point is that having debt of $N doesn't always mean the value of the house is automatically adjusted by $N. Value is in the eye of beholder, or buyer in this case.


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