WSJ had an article today discussing "souring Home Equity Lines of Credit."
Many homes have not only a first mortgage, but often a second mortgage and/or a HELOC (Home Equity Line of Credit). While banks can foreclose on a first-lien mortgage, lenders often have little recourse when trying to collect a delinquent home-equity loan, especially if another bank holds the primary mortgage. Banks holding home-equity loans generally can only seize the collateral -- a house -- after the mortgage is paid off. When another bank holds the mortgage and the mortgage payments are current, the home-equity lender is effectively powerless to collect the debt.
Unfortunately for home-equity lenders, many borrowers understand that there are few repercussions if they stop making payments on their home-equity loan. "Lenders are seeing people go delinquent on home equity who by all rights wouldn't be expected to go delinquent," said Dan Balkin of Wholesale Access, a Maryland research and consulting firm that specializes in the mortgage industry. Lesson to would-be homeowners. Keep your mortgage lenders and home equity lenders separate!
This article also touches on why it can be difficult to get the ok on a short-sale. All lenders need to agree, but a lot of times the HELOC and second-mortgage will get back Z-E-R-O, while the first-mortgage can get back most of the loan. Knowing this situation, HELOC and 2nds often feel it is better to wait and see given the alternative is zero.
