Housing Counsel: Explaining Subordination
Written by Benny L. Kass on Sunday, 08 July 2007 7:00 pm
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Question: What does Subordination mean? We have a first trust and a home equity loan, which we learned is referred to as a HELOC. We applied for a refinance loan with a mortgage lender and were asked if we wanted to payoff the HELOC. When we opted to keep that loan on the books, the loan officer advised that it would have to be subordinated, but that the loan officer would take care of it.
We set up a settlement date, and on the morning of settlement, the lender advised us that the HELOC had not been subordinated, and further that we had to make the arrangements. When we contacted the HELOC lender, we were advised that the new lender had to make the arrangements.
The net result is that we were unable to settle at the loan rate which we had locked in, and had to pay a higher interest rate. The lenders were pointing fingers at each other, and both lenders were blaming the settlement company. We were the victims, who were caught in the middle of this three-ring circus.
What went wrong? Do we have any recourse?
Answer: Yes, since the refinance lender promised you that he would take care of the subordination, that lender breached its commitment and should be forced to honor the original lock-in interest rate.
I suggest that you contact the senior vice-president of the lender, explain the situation and ask them to correct the problem. If the lender (which happens to be a major, national bank) refuses, I would formally complain to the following government agencies: the Attorney General in your state, the Federal Trade Commission, and the Federal Reserve Board.
If you have proof that your lender made this promise to you (such as having a witness present) the fact that it may have been a verbal statement does not mean it is not binding. Oral contracts are enforceable except when real estate matters are involved. But here, we have a mortgage loan case -- and not
a real estate issue.
What is subordination? An online dictionary defines this as "to make subject or subservient, or to treat as of less value or importance."
Let's take your situation: your home is worth $400,000, and you have a first trust (mortgage) in the amount of $150,000, and a HELOC in the amount of $100,000. It should be noted that the HELOC is a second trust, which is recorded among the land records in jurisdiction where your property is located.
You want to refinance the first trust, but keep the second in place. Your new lender wants to be in first trust position, so that should you become delinquent on your loan payments, that lender will be able to foreclose and be first in line to get the sales proceeds.
When you refinance, the moneys from the new lender will be used to pay off the original first mortgage. That means that your HELOC -- which was in second position -- will automatically become first in line.
Accordingly, you were asked to enter into a "subordination agreement" whereby you -- and the HELOC lender -- agree that the HELOC will remain in second place. This agreement is recorded among the land records at the same time that your new first trust is recorded.
The process to obtain a subordination agreement usually takes a couple of weeks, since it has to be signed by the HELOC lender. Your new lender should have alerted the settlement company that subordination was required, and obviously this was not done.
Does your settlement company share any of the blame? Possibly. But many homeowners who refinance want to pay off both loan, and if that company was not aware of your intentions, it may not be responsible for the problem.
Your situation is unfortunate, but I believe you have recourse. And I also suggest that you made the right decision to keep you HELOC in place.
The home equity loan gives you access to instant cash, when you need it. You do not pay interest on the loan until you take your money. In effect, the checkbook is in your dresser drawer waiting to be used.