Anyone considering taking out a home equity loan or line of credit should know that real estate laws typically do not protect consumers against collection efforts for these types of loans. In the event your mortgage lender forecloses your primary mortgage and there is insufficient value to repay all lenders, home equity lenders may be "wiped out" and lose any collateral interest held in your home. This does not mean that they cannot pursue you to collect what you owe them.
Mortgages, Deficiency Judgments, and Home Equity Loans
Mortgage foreclosure laws are determined by state law, and differ from state to state. Some states, typically those using a judicial foreclosure process, may permit mortgage lenders to seek a deficiency judgement for losses resulting from foreclosing your primary mortgage. Other states prohibit deficiency judgments, but in either case, home equity lenders may be allowed to continue collection efforts.
Home Equity Loans and Lines of Credit Not Considered Purchase Money Loans
Refinance mortgages and home equity financing were developed after laws allowing or protecting homeowners from deficiency judgments on primary mortgages were passed; deficiency judgements apply to purchase money mortgages only. This leaves a legal loophole for home equity lenders, and in some cases, refinance mortgage lenders, to pursue collection of amounts owed to them as determined by state laws.
Walking Away From Your Mortgage and Toward More Trouble
Although borrowers may elect to default on mortgages they can afford to pay, this leads to foreclosure, damaged credit, and potential legal action and collection activity.