As a Las Vegas Bankruptcy lawyer, I often meet people who have questions about a loan they have called a “line of credit.” Also known as an Equity Line or Loan, HELOC, which stands for home equity line of credit, these types of loans were aggressively marketed to homeowners in southern Nevada. Unfortunately, many people are confused about just what these loans are.
There were plenty of advantages to taking out this kind of loan 3 – 5 years ago. You signed paperwork and obtained access to a ton of money. The interest rate on the loan was often very low, and in many instances, you only had to pay the interest on the debt, at least at first. You accessed the money just by writing a check. This loan may have seemed too good to be true, and in hindsight, it probably was.
For myself, in 2006, I paid off my credit cards, remodeled my office building, and had weight loss and lasik surgery. I figured all of these were an investment in my future. So what if I had a big debt secured by my home? In the worst case scenario, I could always refinance the loan down the road when the balance of the loan became due.
If, like me, you obtained one of these loans, you may have also borrowed money to invest in your future, paying for your children’s education, taking your dream vacation, buying a car, or just paying off high interest debts.
When obtaining these loans, we focused on all the good things these loans could provide us. None of us had a crystal ball that let us see that our home would lose half of its value, or that we were vulnerable to losing our job or having our wages or benefits substantially cut. For many people, that home equity line of credit had a balloon clause, meaning that the entire balance of the loan might be due and payable in full in as little as five years after getting the loan.
So what is the legal responsibility involved with an equity line of credit? Like the old breath mint commercial, an equity line of credit is “two, two, two loans in one.”
First, and probably not surprisingly, it is a bank loan. When you borrow money, you sign an agreement to repay it in the future. Repayment terms can vary widely. Many of these loans provided for interest only repayment for five to ten years, and at the end of the repayment period, required a balloon payment, meaning the entire balance had to be paid off in full.
When taking out this loan, many of us thought that we wouldn’t have any problem renewing the loan as long as we made the monthly payments on time. That’s because the equity line of credit is also a second mortgage on real estate. As long as the bank also had the right to foreclose on the valuable real estate to collect on the loan, the bank was willing to lend the money secured by the equity. But with the collapse of the value of real estate, that equity no longer exists. So there may be no chance to renew these loans because there isn’t any collateral left in real estate that will allow the bank any profit if someone can’t pay and the bank needs to foreclose.
In addition, many people lost their property through foreclosure. Although the second mortgage died when the first mortgage was foreclosed, this does not mean that the loan for the second mortgage also died. The bank that gave you the second mortgage had your personal promise that you would pay the debt. The bank still has the right to sue someone in court to collect on that debt if they don’t get paid, just as they have the right to sue for any other kind of debt.
A recent change to the Nevada law does limit the bank’s ability to collect on these kinds of debts, but only if the foreclosure on the first mortgage happened after September 1, 2011. If you have lost your property due to a foreclosure and had a second mortgage, you may wish to consult with an attorney about your legal obligation to repay the second mortgage and to understand your legal rights.