Real Estate Matters

Real Estate Matters: Failure to Repay Home-Equity Lines Can Result in Foreclosure

By Ilyce R. Glink with Samuel J. Tamkin
Saturday, October 17, 2009

Q: I live in Maryland and recently became unemployed. I have enough money to pay my monthly first-mortgage payment with Bank A for two years, if I do not make my home-equity line-of-credit payments to Bank B. Can Bank B foreclose on my home if I am current on my first-mortgage payments? If Bank B cannot foreclose, what legal action can it take against me?

A: I'm sorry you have become unemployed and wish you luck in finding a job soon. Unfortunately, you should know that either of your lenders has the right to foreclose on your home if you default on either loan.

When a lender gives you a loan, your home secures the payment on that loan. That gives the lender the right to sell the home if you fail to make good on your obligation to pay the debt.

In your case, and in the case of millions of other homeowners, you have two lenders. The first lender is probably the lender that gave you the most money to buy the property. The second lender gave you the home-equity line of credit (HELOC).

If you fail to pay on the first loan, your first lender can foreclose on its mortgage on your home. The foreclosure proceedings would allow the lender to sell the home and use the funds from the sale to satisfy its debt. If there are any funds left over after the first lender satisfies its debt, the second lender could receive funds. In most cases these days, upon foreclosure of a first loan, the second lender is wiped out.

However, if the first lender's loan is current and is not in default, but the second lender's loan is in default, that second lender has the right to foreclose on the home and any proceeds from the sale of the home could go to pay off the second lender. But any buyer in foreclosure proceedings by the second lender would take title subject to the lien and obligation to pay the first lender its loan.

If your home is worth less than what you owe the second lender, it is probable that the second lender would have the remedy to foreclose on the home, but would get nothing from foreclosure proceedings. In addition, a foreclosure action by the second lender could give the first lender the right to commence its own foreclosure proceedings and leave the second lender with nothing.

These days, many second lenders are cutting deals with borrowers to get something rather than face the prospect of losing everything. I have seen cases in which second lenders requested a $5,000 payment from borrowers to cancel a second loan in which the amount owed was $50,000 to $60,000.

But those offers by second lenders usually come when they know the homeowner has no equity and that if the borrower faces foreclosure by the first lender, they will end up with nothing.

Lenders also have the legal right in many states to pursue a separate legal action against a borrower to go after a borrower's other assets. In essence, the lender can foreclose on the property and get nothing from the sale and then turn around and ask the court for a deficiency judgment against the homeowner. If a deficiency judgment is granted, the lender obtains a judgment against the borrower for the amount still owed on the property and can go after the borrower's other assets.

Some states prohibit lenders from going after borrowers for a deficiency in cases involving the homeowner's primary residence. In some states, deficiency judgments are limited as a result of the method in which lenders decided to secure their mortgages against their borrowers' properties. And in other states, courts may not have the desire or ability, due to their caseload, to grant deficiency judgments against homeowners.

Finally, in many cases, lenders opt not to pursue deficiency judgments against borrowers simply because they have decided that spending more money on legal fees is not worth whatever they might recover.

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