If you have a second mortgage (home equity line or fixed term), and you are not going to pay it off during a refinance; it needs to be “subordinated”. This is because of lien position with your mortgages…who gets to be first. Lien position is determined by when a document (such as a Deed of Trust) is recorded at the county. If you have two mortgages and are only refinancing the first mortgage, the second mortgage will need to be “subordinated”. The subordination agreement is a recorded document with the second mortgage lien holder and the borrower that the second mortgage will go back into second position after the new first mortgage is recorded. If this document was not recorded, than the old second mortgage would be in “first lien position” and the new refinance would be in “second lien position”. This boils down to which mortgage has more rights in the event of a foreclosure…everyone wants to be first as the further down the line you are, the higher the odds are that the lien may not be cashed out (again, in a worse case scenario).
Prior to our current mortgage crisis, a subordination agreement typically was not an issue. We send a request for subordination along with a copy of the appraisal from the refi. The second mortgage lien holder would review the request, consider the amount of equity remaining in the property and 9 times out of 10, agree. This process would take a couple days.
With more banks being concerned about depreciating or soft values, they are now taking much much longer to consider if they will all allow a subordination to take place. In fact, I recently closed a transaction where the bank took over 10 business days (this eats away at your lock) for a borrower with 800 credit scores and a loan to value of just over 50% to subordinate a HELOC that with a zero balance. An Account Manager from a bank that does a large amount of second mortgage recently sent out this memo:
“UPDATE on SUBORDINATIONS: Please get your files in early… the subordination dept is running approx 20 business days. I do not have any contacts for rushes etc. They are trying to work date sensitive deals, but they have not been able to get caught up…”
Folks…20 business days is a month!
If you are refinancing and have a second mortgage or HELOC that will not be included in the refinance, make sure your loan originator is aware and that they know how long subordinations are taking so they can lock your rate in appropriately. A 30 day lock with a 20 day subordination is not going to cut it. You’ll be looking at having to deal with a lock extension.
If your loan to value is higher, there is a possibility that the subordination may be declined. Discuss this with your loan originator upfront. Lenders are looking at any way to protect themselves from additional risk during these historic times. If your loan amount qualifies and you have enough equity, you just may have to include that second mortgage in your refinance.