It doesn’t matter whether the HELOC is from the original lenders or not.. or HELOC financing was used to do the original purchase. HELOCs are recourse loans. The only ones that aren’t are original purchase loans. (NOTE: Other states may vary in this).
Using an HELOC attached to a property just being purchased, to finance the original purchase is on the creative side of financing. I don’t know why they loan was not done with a subordinate 2nd instead of an HELOC.. other than that the bank generally gets higher rates on HELOCs than subordinate 2nds.
If the original purchase loan on property #1 is the 5/1 loan, it is a non-recourse loan. The NegAm is likely a non-recourse. I would recommend having them verified by a tax attorney if possible. Your exposure seems to be the HELOCs/credit agencies/1099s. I suspect you’ll be 1099’d. For the bank to pursue you through the credit agency, they generally have to discount what the amount is when selling the paper to the credit agency to collect on. 1099s allow them to write the full amount off on their books w/o muss or fuss.
The next question has to do with how much total outstanding loans are comparable houses presently going in that area. Consider that the HELOCs are subordinate to the primary loans, they only get money that is left after the primary has been satisfied on a foreclosure. Are the HELOCs 100% under water (comps would only cover the primary loans and not the HELOCs)?
The above is important because if the comps are such that the remainder of the equity would clear out part of the HELOCs, you want to push hard for immediate short sales. Otherwise you end up riding the market down because the amount you get 1099’d on is the difference between the amount the house eventually sells for and outstanding loan balance (allowing for non-recourse primary loan recovery first). The HELOC holder has no initiative to move quickly because either way, they either get a percentage of the amount and 1099 you for the rest, or the 1099 you for the full amount. I would recommend getting a good loss mitigation professional for this (and not a fly by night one either).
