Mortgage Risks and Foreclosure

Not if you have a mortgage. You may end up owing hundreds of thousands all of a sudden with no equity backing it.

Banks get the property when you cant pay the mortgage.

In most states, mortgages are non-recourse loans, meaning that in effect the bank has to eat any losses, if you choose to play hardball. If they foreclose on the house and repossess it, the loan is considered settled, and they can't attempt to collect the difference, even if the house is worth less than the value of the loan was.

How is this related to mortgages being bad?

The contract carefully outlines what is it to happen in case the borrower finds himself unable to make payments. It is not as if he's stolen the money; he's loosing the property AND the percentage of mortgage payed so far.The lender is to keep all the cash received so far, and the ownership of the house as well. If the property happens to have been so overpriced that he's loosing money anyway... so bad. They are supposed to be professionals asserting the risk. If they chose to ignore those ri

The house is the collateral in a mortgage though.

not if the bank forecloses on it...

You don't lose your home if the bank goes out of business. Mortgage holdings are sold off as assets as part of the bankruptcy settlement. The ownership of the underlying mortgage changes, not the ownership of the home.

Also, mortgages are implicitly backed by the home itself. In the worst case scenario the bank can claim the property back and sell it to recoup their losses.

You mean a situation where I could not afford the installments and therefore would be forced to sell it?In my corner of the world banks are required to assume a 2,5-5 percentage point buffer when calculating mortgage eligibility - the upper bracket is for variable interest rate mortgages. An unlikely scenario, but keeps the risk of what you mentioned low.