” Can the bank sue the person for the loss or are they basically free and clear of tha thuge loss? ”

No, the bank can’t sue if the mortgage was as non-recourse purchase loan. But they can sue if the house was refinanced. That prevents owners from refinancing and walking away with equity money leaving the bank to hold the bag.

I don’t remember the exact code section but it’s a left-over from the depression era.

What does it have to do with honesty? A contract is a contract. What does it say? The bank will treat you per the letter of the contract. You might as well do the same to them.

What you say is a good idea but most buyers have refinanced a few times, so they are out of luck.