Selling Collateral?

(house is in Massachusetts, loan was taken out in China somewhere)

What is the legality of selling an object placed as collateral?

Here's the circumstances:

SO's father moved to China and started a company. At some point, he placed his American house as collateral for a loan which is expected to be repayed within this year. He doesn't have the money, and wants (1) SO's mother to sell the house and (2) transfer the money to our accounts so that it's safe from his impending bankruptcy.

I know that (2) is fraud, and I will have nothing to do with it. But I don't know if (1) is even legal; if this house is collateral, can they just choose to sell it legally? If SO's mother divorces SO's father and takes half the value of the house, is that fraud?