It's BS but the same thing happens if your car gets totaled while you're still paying for it. If your insurance can't cover the rest of your loan, you gotta pay it off. Sometimes you can buy a second insurance plan - gap coverage - which as the name suggests is supposed to cover the gap between your accident coverage and your outstanding loan amount.

In the case of a mortgage I think declaring bankruptcy might be the most rational move. The bank will take the land but the debt will be discharged, and with time you can rebuild your credit and get another one. It's a better out than defaulting and losing the land that way in any event. If you own the land outright then you can take out a new mortgage to rebuild, but damn that sucks especially if you spent thirty years repaying the original one.