Minor point perhaps, but rather than a HELOC, it seems a little more likely that they refi’d other debt into their first mortgage using the increased equity. Could be for credit cards, cash-out, healthcare, or even rolled a previous HELCO in, who knows…
The reason for my assumption is that typically all lenders need to approve a short-sale, and the HELOC lender (who would be in second position, at best) likely will lose a huge fraction on a short sale, so are unlikely to approve.
This would tend to force things into foreclosure, rather than a short sale.
For example:
1st loan: $300k
HELOC for $100k (using equity)
This would need to sell for around $430k to not owe money at closing (~6 pct to realty etc.)
If the short sale was for, say $350k, the fist loan holder would get their $300k, but the HELCO owner would only get at most $50k at closing, and the former owner would still owe the fees. In some states, the lender can try to seize assets to cover and/or hand the former owner a 1099 for the $50k.
I’ve been out of it for a while, so the exact details may be off, but it still really quite ugly.
While there are plenty of specu-vestors and dkheads out there, I still know plenty of folks who just wanted to live in their own home, raise kids and get a dog. I don’t want to bail them out, but I also don’t get the foreclosure parties around here.
