"if your house is worth $500k and you owe $100k, you do not own your house, the bank does. you are in credit $400k at the current value. the banks can use that credit as collateral on their books as a hedge against other investments. therefore, if the bank falls over they have turned you into an unsecured creditor. goodbye house."
As a property owner with a mortgage, a person gets the right of possession, control, exclusion, enjoyment and disposal. If the banks were the owners, then you and everybody else with a mortgage would be tenants.
The banks only take possession of your title, because when getting the loan, you have promised them to give the property as a collateral, a promise that they can enforce you to honor, if you default.
When you default, then the banks can, under the terms of the loan contract, demand immediate payment in full, which in the overwhelming majority of the cases triggers a force sale to be either organized by the bank or the owner himself.
Banks that fail can only pass the contracts in their loan books to others, which maybe their creditors or outside investors willing to buy them. The terms of the contracts do not change, except in what concerns the entity to whom the loan payments have to be effectuate.
To say that a debtor can be an unsecure creditor is an oxymoron.
Loans secured by mortgages are just financial instruments that can change hands multiple times during the life the loan. They originate in what is called the primary mortgage market and may end by being traded in the secondary market through a process in which the borrower has no participation.
