Going back to our 1 milion house example with an 800k mortgage, if the price drops by 20%, suddenly, the bank owns 100% equity. They are not allowed to own 100% equity so they “margin call” the client: he has to come up with 100-200k within a few weeks or else, his house will be seized.
Most people don’t have that kind of money laying around so… the house is seized and sold at a discount by the bank.