Why would it be financial ruin? California is a non-recourse state. The highly paid engineer who bought the multi-million dollar home can easily stop paying on the home and live there "rent free" for several months, recouping their down payment. By the time they are foreclosed on, they will have a sizable nest egg to do what they want with. In your scenario, the person would be "financially ruined" presumably due to a downturn in housing. In my scenario, they would be in a better position to buy again in several years at more sane levels, while ridding themselves of all the downside on their bad real estate. The only cost is a relatively minor (you can still get credit cards, etc) hit to credit for about 3 years, and in general your interest rates will be higher. But you're also cash rich, so who cares.

If somebody is older with little income and goes through the exact same scenario, they would be ruined, assuming all their net worth is in real estate. However in that case I'd argue that's more about their own poor/risky financial choices. There would be less people acting like their primary residence is an investment if the market wasn't so absurd to begin with.