[ex-Texan]

Scenario #1: Man borrows $ 500,000 on a preexisting home that just three years before was valued at $ 160,000. Then the housing bubble bursts. Turns out the house is only worth $ 200,000. You really believe the mortgage company would not demand $ 300,000? The stock holders would mandate such a move. How much do you want to bet the lender would not file suit claiming appraisal fraud?

Use your imagination. If the bubble bursts (not just leaks), lenders will become very aggressive. "Demons from hell," might be more accurate.

[investigateworld]

The appraiser, who was hired by the mortgage company, may have some risk, especially if there was collusion and/or fraud.
Short of that, the mortgage company is on their own.

[American_Centurion]

If a mortgage company demands the $300,000 dollar difference between the loan and the property value, their only recourse toward the property owner is foreclosure.

The home owner will file bankruptcy, the mortgage co. will foreclose and will be lucky to get 200,000 at auction for the house...OR the mortgage company could not hassle the homeowner and continue to recieve payments and I believe in this circumstance require PMI for the $300,000 or a portion thereof.

Stockholders that force the mortgage co. to foreclose in such situations are only shooting themselves in the foot. I'm fairly certain that, though many will be screwed, the "Demons from hell" scenario you envision will not happen. Many people will be stuck with living in the house they are in practically forever, some will commit insurance fraud, and some will file bankruptcy.

[LadyNavyVet]

Yes, I believe the mortgage company is prohibited by law from demanding more than the amount on the note. And that amount is not demandable unless the house is sold. Other than that they may only demand PITI each month.

I don't have time to double check right now, but I believe callable mortgages were outlawed after the Great Depression, when so many people lost their homes to unscrupulous lenders.