My friend bought a house for $675,000 2 years ago. The bank agreed to...

[antony]

...short-sell the property for $485,000.? My friend retired from his job and can no longer afford to pay the mortgage. Who else lose money aside from the bank and my friend?

[Real Estate Guy]

First, your friend just can't walk away: read this: http://www.washingtonpost.com/wp-dyn/content/article/2008/04/11/AR2008041101914.html

2nd, why did he purchase a house that he couldn't afford. It's no ones fault but his that he can't afford the house because HE RETIRED.