You know, I'm pretty empathetic and sympathetic when people fall on hard times---I've been there!
However there are times that I can't muster up a lot of sympathy for some people! This woman has allowed this to happen to herself and her husband....
1) adjustable rate mortgage is pretty damned self explanatory! Ours was, H and I knew it when we signed on the dotted line. Thus, when the payment was to balloon, we re-fi'd.
2) unless she is completely and totally disabled, then her butt should have gotten a job. This is not something that you wake up to one morning! It takes several months to get as far behind as the OPs friend is. Good grief! I got a second job....so I can hopefully keep my home when the divorce is final!
3) LYING BY OMISSION, IS STILL LYING! "forgetting" to tell the husband, or thinking it would be better if he didn't know--is such a friggin' cop-out! Don't get me started on this aspect of it.
4) who in their right mind buys a "house" where 3 of 4 bathrooms are inoperable? Or at the very least doesn't fix the problems upon moving in.
5) Seriously, way too much drama (I'm working hard on weeding the drama out of my life!). OP, you didn't ask, but if I were you I'd stay the hell out of the situation.
And the really cynical side of me wonders if the friend doesn't have some sort of addiction (gambling, shopping, drugs, etc.) where it's her fault entirely that she's going to lose it all.

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Mental that one, I'm telling you. ---Ron Weasley, "Harry Potter and the Chamber of Secrets"