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What happens to a HELOC after foreclosure?

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POSTED November 8, 2012 7:29 p.m.

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.

Due to circumstances involving our elderly parents, we both still live in our respective homes. I know, it’s not the best situation for a newly married couple, but we deal with it. So, basically, my primary residence is still my home, and my husband’s primary residence is still his home.

We would like to sell both homes and purchase a new one together, but we do not want to do anything that could cause us to have a tax burden for capital gains or some other legal issue. We have sought and received so many conflicting answers and information about this process with regard to the taxes for capital gains and when we can and cannot do this. We are so confused that we even went to the local Internal Revenue Service office and they could not even answer the question with straightforward answers.

Could you please give us some guidance and answers as to exactly how we can legally do this? --Susan

DEAR SUSAN: Periodically, just before the tax deadline on April 15, the Wall Street Journal runs a story about the IRS. They pose the same question to several different local IRS offices, and always get different answers. So I understand your frustration.

Perhaps I am missing something. So long as you and your new husband have each owned and lived in your respective houses for two out of the last five years before they are sold, and you both file separate tax returns, you can each exclude up to $250,000 of any profit you each may make when you sell your individual homes.

DEAR BENNY: When buying a home, is there anything in the home inspection that the seller must fix before the completion of the sale? How does the seller know the contents of the inspection? --Carmeline

DEAR CARMELINE: That’s a very good question. First, when you sign a contract to buy a house (whether it’s an existing or a newly built home), the contract should contain a home inspection contingency. A contingency gives you the right to cancel the sales contract and get your earnest money refunded if a particular condition is not met.

There are, from my experience, two kinds of home inspections contingencies: (1) if the home inspector finds problems, regardless of what they are, you have the absolute right to back out from the sales contract; or (2) if the inspector finds problems, you present those to the seller and give him X number of days to correct or give you a cash credit. If the seller refuses, you can then decide whether to go forward with the purchase or walk away.

Personally, I like the first option; it gives the buyer a “cooling off” period. All too often, real estate contracts are entered into late at night when the buyer is both on an emotional high but at the same time emotionally drained.

Regardless, however, do not let anyone convince you not to have a home inspection. I have represented too many buyers who failed to get their house inspected only to find major (or minor) problems that could have been corrected before closing.

And, a good real estate agent should provide you with the names of at least two home inspectors. You want to make sure that the inspector you use will be independent and not a “mouthpiece” for the real estate industry that gives him the business.

You asked how the seller will learn about the inspection. If you want to cancel the contract or ask the seller to make some or all of the necessary repairs, you will get a written report from the inspector and you will forward that on to the seller.

 

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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