What happens to a HELOC after foreclosure?

Homeowner unsure why he must continue payments following bank's repossession

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Nov. 6, 2012

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Homeowner unsure why he must continue payments following bank's repossession

Benny Kass
Inman News®

DEAR BENNY: I lost my home to foreclosure in August 2011. I had a second mortgage on the home that was secured by a deed of trust for $99,000. This was a home equity line of credit (HELOC) that I used to pay off a pool loan, used for home improvements and later tapped each month to make the mortgage payment.

Now that the house is gone, I am not responsible for the deficiency on the first mortgage. But I'm still being billed (and I'm making the payment) for the second!

My question is this: How did the title clear and someone purchase my house with the second lien still in place? The lien holder on the second knew I moved and that the house sold.

I've talked to attorneys about a bankruptcy, but I'm trying to avoid that. --Tom

DEAR TOM: My answer has to be general because I do not practice law nationwide. And although I believe the law is the same all over, I don't want to mislead my readers. If any reader has the same situation as does Tom, please check with a local attorney about your state laws.

In general, when a first trust (mortgage) holder forecloses, it wipes out any secondary mortgage (deed of trust) loan. This does not mean that Tom does not owe anything more to the second lender. In most states, second mortgages are "recourse loans," meaning lenders have the right to pursue claims against borrowers for any debt that's not paid off from the proceeds of a foreclosure sale.

What it does mean is that the second trust holder has lost its ability to foreclose. The second trust is no longer, by operation of law, a lien or a cloud on the title.

Not all liens are wiped out, however. Most federal and state tax liens remain on the books. But for specifics, check with your own legal advisers.

DEAR BENNY: I moved into a condo in Illinois at the end of December 2011. We had a board meeting last night and they approved board minute meetings from Sept. 2011. During the minutes review it was stated that a former handyman was advised not to visit our building due to a "pending lawsuit." I raised a question to this, as I received a disclosure form dated Dec 22, 2011, stating that there were no pending lawsuits. After questioning this, our management company representative stated that it was not a lawsuit, but rather an administrative hearing.

My question is, do I have any recourse if it already is, or turns into, a lawsuit? I've heard rumors that the board plans on raiding our reserves to pay for any costs caused by this instead of having every resident pay a special assessment. --Kevin

DEAR KEVIN: Technically, it could be argued that a "lawsuit" is not the same as an "administrative hearing" but I would not represent anyone taking that position. When I counsel my condominium clients on what to say (and what not to say) in their disclosure packages, I always urge full and complete disclosure.

But have you been injured? I doubt that you can honestly say that you would not have purchased your unit had you known about that matter. My suggestion: Wait to determine the results of that hearing. If your condo has to pay a large fine (or judgment), then I would argue that you have been injured. What's your remedy? Tell the association that you will not pay anything for that case.

That, of course, begs the question. If the association takes the money out of its operating (or reserve) account, you are paying indirectly. Perhaps you can convince the association to issue a special assessment against all owners, in which case you will not have to pay.

Alternatively, the association can give you a dollar amount by way of a settlement.

You might, of course, have to retain your own attorney to assist you, and that will cost money.

Bottom line: The association, in my opinion, did err in not disclosing. Perhaps the association should ask the property manager who prepared the disclosure statement to reimburse you (or the association) for any moneys that will have to be paid based on that admin hearing.

DEAR BENNY: My husband and I are in our 60s and have been married for five years. We both own homes that are fully paid for. Both homes before the market downturn most likely would have sold for around $200,000 each. In today's market, we're not so sure.

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