Let's say you have a group attending Gen Con. One member of your group gets a good time for the Housing Lottery and registers a room for the group in their name. What happens if that person can no longer attend and needs to cancel their badge? Does the rest of the group lose their room? Any info on this is much appreciated.

ROOM ASSIGNMENT MANAGEMENT (new!)All room assignments are unique and personal to the Gen Con account holder who purchased the badge and requested the assignment. The account holder can manage their room assignment as indicated under the respective Cancellation and Modifications Policies, either by making the change online or by contacting Gen Con Housing call center for assistance.Room assignments cannot be transferred, traded, or otherwise re-assigned among Gen Con accounts, and room assignments connected to one Gen Con account will remain associated with the originating account until registration ends or the room assignment is cancelled.

From our Housing and Travel Page which can be seen here:

https://www.gencon.com/attend/housing_travel

User Tip! Individuals intending to share rooms should consider the Room Management limitations carefully before buying badges and requesting room assignments: If the account holder cancels his/her badge and becomes ineligible for a room assignment, the room assignment itself becomes invalid and will need to be cancelled. Room assignments issued to one Gen Con account cannot be transferred to another account. 

One thing that’s not quite clear is what happens if a non-account holder cancels. Let’s say I buy 3 badges through my account, and book two rooms. Then, one of my friends can’t go, and I get a refund for the badge. Would I lose the 2nd room now that I only have 2 people on the account?

There are some work arounds. I would encourage your friend to keep his badge and your group cover him for the badge unless you're ok not having a downtown hotel room.
As I learned last year, once Gen Con releases the rooms to the individual hotels which is a couple weeks before the con, you can contact the hotel directly and transfer the room to another person, however you can NOT transfer through the Gen Con website so you have to wait till this point meaning you're going to eat some cash on the badge cost. 

For me it would be worth it, but for others maybe not. 
 

To piggyback off of the previous post. Always call the hotel 48-72 hours before you arrive to confirm your reservation. I'm read stories about overbookings, and miscommunications at certain hotels.