I believe your right on if a property drops 20% on an 80/20, the heloc essentially becomes an unsecured loan. However, they still have (on paper) a lien on the property. It’s almost like comparing preferred stock to common stock in the event of a liquidation of a company. I do know that, for example, if a borrower has an option arm and the loan balance exceeds a certain LTV from the originating value, the borrower will need to pay down some of the loan. Almost like a margin call. I’m not sure if all lenders require this but I know my bank (that I work for) requires this.
