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.
Thank you for this information! My mortgage broker just commented about the subordination, which I didn’t know anything about. This gave me a launch pad for discussion with my broker so we’re on the same page moving forward.
Thank you!
Mortgage servicers have become a bit more cooperative during this current climate…especially with Home Affordable refinances.
Rhonda, I going through with a refi now and my HELOC credit union is forcing me to raise my rate from 1.65% to 5% or they won’t subordinate. Is this legal? Can they change my interest rate and if so by that much? I feel like I’m being held hostage.
Billjaques, that’s one I haven’t heard before–wow! Are they claiming it’s due to lost equity in your home?
I’m not sure of the legality. I know they don’t have to subordinate. It’s more common for second lien holders to require that a line amount be reduced or closed…but as I said, the rate increase is something new.
The line was already frozen awhile back. Called them today and they said there are no exceptions. Woman at the credit union claims she has the same 1.65% rate on her HELOC and has not refi’d because they would also raise her rate to 5% even though she works there. I can’t find anything on the internet on the legality of this. Hopefully some of your followers will see this and know the answer. Funny thing is I have perfect credit and equity. I’m going from 6% to 3.875% on my 1st. This makes be a better risk, not worst. I see it as a scam to try to force people out of HELOCs that they sold 3 and 4 years back thinking prime rate was going back up and it hasn’t. I hate losing the 1.65%, but I owe 359k on my 1st, it makes no sense not to refi.
Possibly…I’m sure there are attorneys looking to add to their class actions regarding issues with subordinating second mortgages.
Is there usually a charge that goes along with this subordination process? I am being required to pay a $200 fee. Just wondering if this is usual practice.
Hi Tracie,
There is typically a charge for processing the subordination request. When I’m quoting a client, I use $200 for the estimated fee although it can range from no charge (rare) and I’ve seen as high as $300. This is a “third party” cost which is charged by the second mortgage/HELOC lender which is why we LO’s have to estimate the charges. Also, just because you’re paying the fee is not a guarantee the lender will subordinate it — it’s generally just the fee to process the request to subordinate.
Hello Rhonda,
Thank you for having the first informative column on Mortgage Subordination.
My specific issue:
I have a first and second (HELOC)
First with B of A (nightmare)previously Countrywide and a 2nd with PNC.
My first balance is $500K and the second is $95K.
I’m thinking of refinancing my first to get a better rate.
I had two appraisals done in the last 45 days. One came in at $635K and the 2nd at $625K.
My question:
Can I re-finance the first with no money down, since it seems like I have the 20% equity to the first mortgage holder? and then have the second subordinate the loan?
OR will I need to have 20% equity on the outstanding combined balance of $595K?
Hope I was clear!
Thanks,
Jake
Hi Jake,
It’s up to the second mortgage lien holder (PNC in your case) if they will allow the subordination. The more equity you have, the better your odds of an approved subordination. With that said, second lien holders have been more flexible these days – especially if the first mortgage refinance is HARP.
You can see if your mortgage originator has the guidelines for PNC. Most second mortgage lien holders charge a fee just for reviewing the subordination request which is charged whether or not the subordination is approved.
Rhonda,I’m doing a re-fi and I have a heloc with no balance for 2.95%. Bank said I have to lower it from $135,200 to $75,000. No problem but now they want $250 for the subordination. Should I close the heloc to the avoid the fee or is the rate too good? The bank never mentioned a fee,it’s the title company asking for it.Borrowing 87,000 on a 230,000 approximate value. Thank you Mark
Mark, banks will still charge a fee typically ranging around $250 for the processing of the subordination request. This fee is charged even if the bank does not approve the subordination (sounds like in your case, the subordination was approved).
If you close the HELOC, the bank may have a fee for that (check before you close it) and there may be an additional reconveyance fee by the escrow/title company (check first). Reconveyance fees are typically around $100 – $200 dollars (at least in the greater Seattle area).
I totally disagree. We tried to refinance and they flat out refused to sign it. After much argument and MONTHS of fighting we lost the battle. Now we have to pay a huge intrest rate on our first mortgage. By law they should be made to sign it. We could’ve saved so much money.