President Bush signed into law a policy that protects you from being taxed on the money lost by the foreclosure lender. IN other words, if the bank writes off $50,000 in debt, that's like they just gave you $50,000 and normally that would be taxable. With the lending debaucle going on, there would not be tax owed but I don't know if that precludes you from also being sued later. You really do need to contact an attorney.
Could you renegotiate your loan?
The attorney will most likely suggest that you talk to the bank about a short sale first. which will be less harmful to your future credit rating than a foreclosure. A short sale is usually less expensive for the mortgage lender as well, so they often prefer that procedure. A short sale is a cooperative effort by you and the bank where you contact the bank about your inability to pay your existing loan and they may agree to have you list the property for sale at below the amount you owe on the mortgage. You will need to tell the bank about the equity loan as well. Typically your mortgage lender and the equity loan lender will have to work together to be able to sell the home. If your first mortgage holder will work with you on a short sale, the equity loan lender will also need to cooperate. The home cannot be legally sold without the agreement of both lenders. It is far better for this information to be shared sooner rather than later when it could jeopardize a Purchase and Sale offer. The Title Company or attorney who will handle the closing will research and find this outstanding lien on the property that will require the loan to be paid or the equity loan lender to agree to a partial settlement.
Call your local BAR Association (the professional organization for attorneys) and ask if there is a free or low cost way to get some legal advice about what to do.