Your credit is definitely being affected.
My suggestion to you would be to contact the bank who has the home equity loan and make sure that your friend is paying as he says he is. He may not be paying.
Then I would suggest that you contact a lawyer for legal advise in this matter.
Whatever your friend does to rectify HIS situation will definitely affect YOU also.
You need legal advice.
Short sale is your best shot to get it off. You should hurry, because banks usually start foreclosing precess after 6 months delinquency. And having a Foreclosure on your credit is not fun at all.