A HELOC or home equity line of credit is a finance tool that is used by homeowners use to withdraw equity that has built up in their home. One of the problems that can occur with these types of loans is that a homeowner can encounter financial trouble and may be unable to pay his or her 2nd mortgage. This situation combined with a first mortgage company and a HELOC from a different lender can be extremely difficult to resolve.

One of the most common methods of resolving a foreclosure with a first mortgage and a HELOC is a loan modification. But when those fail, a short sale or deed in lieu of foreclosure is the next logical loan workout steps.  A deed in lieu is where the borrower basically returns the house to the lender and signs the deed back to them. Thus relinquishing any ownership rights in the property for the borrower. This is extremely simple in concept, but can be extremely difficult when a borrower has a first mortgage lender and a 2nd home equity line of credit lender.

Often, the HELOC lender does not want to be left with bad assets on their balance sheet and no money. So, they are becoming increasingly more dificult to deal with on any type of loan workout. A borrower can ask for a deed in lieu with a HELOC, but it will generally be very difficult accomplish. In addition, most lenders require that a home is placed on the market for short sale before they will entertain a deed in lieu. They usually require that the home be listed for sale for a period of up to six months or more.

You may be able to settle with your lender. Let’s say you owe $50,000, you could quite possibly offer them $5000 to sign off on the second and let you move on with your life. We have seen it happen many times on our forum, but we also have seen many people get denied when they try to negotiate a settlement offer on their HELOC. 

A new trend is that lenders are now charging off the second mortgages and selling them on the secondary market. If you are six months or more late , they sell your loan to investors on Wall Street for pennies on the dollar.

The one thing that is for sure during the loan workout process is that nothing is for sure.  Meaning there are no guarantees that you’ll be able to work out anything.

Some lenders are willing to accept a deed in lieu because it shortens the paperwork that they must do and also gives them the secured asset. Borrowers love to take advantage of a deed in lieu for several reasons. One of the main reasons is that the process does not affect their credit as bad as a foreclosure would.  Also, the process is much shorter and may be done relatively simply with the help of competent legal counsel.

Moe Bedard
My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, LoanSafe.org. My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.