Let us look at an example. Let us say someone purchased their home with a 100% mortgage for $500,000 two years ago and over the last two years, home prices went down 20%.

This would mean that their home would now be worth $400,000. If for some reason they had to sell their home, (say they lot their job) then there is no way they could get the full mortgaged amount of $500,000, so they would have to perform a short sale.