VisaMastercardLOGODuring real estate’s boom years, many duplex and single family home owners tapped into their property’s rapidly escalating equity through the use of a Home Equity Line of Credit or HELOC to pay debt, remodel the kitchen, or take a long dreamed of vacation.

Many other duplex buyers availed themselves of easily available bank credit, financing purchases of duplexes through the use of two mortgages; a first and second. The intention was to pay off the latter in a couple of years; when, as a result of appreciation, they would have earned the equity to refinance and pay off the second.

Kind of like credit cards.

But now, years later, we’re discovering that second mortgages (which is what an equity line is) are a lot more like MasterCard and Visa than we ever imagined.

Many duplex owners owe more on their property than it’s worth. Some, due to job loss, health issues, divorce or relocation can no longer afford to pay either their first or second mortgage. As a result, they face either foreclosure or a short sale.

Minnesota is a non-recourse loan state. As such, the first lien holder or bank may not, following a short sale or foreclosure, chase the duplex owner down and require them to pay the amount they were shorted on the loan.

But guess what?

The second lien holder can.

Why? A clause in the mortgage papers signed when the duplex was purchased.

Just the other day a client was asked to sign a promissary note for the balance of his second mortgage before the lien holder would agree to a short sale.

Turns out the terms of the note are enforceable, and the second mortgage holder can sue for all they’re owed. This is true whether it’s a short sale or even if the property goes through a foreclosure.

So, like a credit card company, they can turn the debt over to a collection agency who will go to great lengths, including getting a deficiency judgement in court, to collect what’s owed and sweep it from the former duplex owner’s account.

Are there any options?

According to Minnesota real estate attorney Richard Glassman, there are three:

  1. Allege fraud
  2. File bankruptcy (eliminating the mortgage debt may or may not be possible if it’s included in a bankruptcy)
  3. Pay or work out a deal to pay all or some of the debt

Until now, I haven’t heard of many short sale owners being pursued by these lien holders.

Apparently that’s changing.

Maybe they could start offering frequent flyer miles to help make the pain go away.