I think you're seriously underestimating the problems a homeowner faces if they purchase a home (with a mortgage) and it later experiences a large reduction in value. This, by the way, is going to happen to a lot of people who have recently bought houses.
First of all, buying a house for $1 million that is later worth $700,000 has no bearing on what is owed to the mortgage company. The mortgaged amount has already been paid to the original seller, that money is gone and the buyer has agreed to repay it. Defaulting on the mortgage can be done, but any money already paid will be lost and the borrower won't be able to obtain another mortgage for 7 years.
Or the homeowner can continue to live in the home, but there are a few potential problems:
1. They cannot sell the house should their life situation change. Depending on the overall real estate market, they may also not be able to rent the house out for an amount that covers the mortgage payment.
2. Not only did they agree to pay $300,000 too much at purchase time, they also are continuing to pay interest on that amount. $1 million for 30 years at 3.5% is $616,000 in interest; $700,000 is $431,000 in interest.
3. The loan cannot be refinanced, because they don't have at least 20% equity in the house. Say that interest rates drop from 3.5% to 3.0% -- that would save $100,000 in interest over 30 years. But in order to refinance, they would need to pay the mortgage down to the point that they have 20% equity in the house (in this example pay the mortgage down to $440,000).
4. Since they have no equity, they cannot obtain a HELOC to help finance home repairs or life events in an emergency.
So yes, investors and speculators will be hurt when their portfolio value drops and those are the risks you take when investing. Homeowners, however, are also hurt by the decline of home values.