Now if you buy a house for $700000 and you can’t afford to make payments then it would be better for you to let the house go. Buy the same house for $425000 and then the bank will get their money (because you can now afford it) and you will get your house and everybody lives happily ever after.

Hmmm. How do you figure that everyone lives happily ever after? One party is going to take a $300,000 loss (most likely taxpayers). So no, everyone isn’t going to live happily ever after. Some scum bucket is going to suck $300K out of the wallets of unhappy taxpayers.