After re-reading my response here, I am surprised at how bitter and anti-bank I sounded. Fortunately, I haven't been in a foreclosure situation, but I know several people who have been through it or are in jeopardy of having it happen and it frustrates me.

Its true if they have insurance, but its a little more complex than that. They do get a tax write off as its legitimately a loss, but that does not cover their entire loss. Also if they get compensated by their insurance, they have to book that as a gain and pay tax on that.

I believe that is true. They can also get a tax write off for the bad debt, so banks really aren't losing any money when they foreclose on you and sell your home for much less than you owe. It's kind of a racket and definitely a system that is heavily in favor of the bank.

Someone I know lost their house recently after being unable to keep up with the mortgage. Now I have heard that banks buy an insurance policy against this kind of situation, so if the property is sold off for less than they lent against it they don't lose out. Is that true?