Wednesday, March 11, 2009

HELOC Resubordination

It all comes down to resubordination. HELOCs and HELs the red headed step child of the mortgage industry are now in control of so many people's destiny. The second lien holders are blocking people's ability to refinance all around the country. It is all about the lenders willing to subordinate. In mortgage terminology resubordination means you leave an existing subordinate (ie. second and third mortgages) mortgage in place and refinance only the existing first mortgage. (That was from the Mortgage Insiders Mortgage University).

After the Obama Housing Plan was revealed we looked at the proposal to extinguish second mortgages. But other these were proposals, not mandates. If the lender agrees to resubordinate than the refinancing can go ahead as is. If they will not, as is common occurrence of late, you will have to include the second mortgage in the refinance. And with falling home values and stricter lender practices this has turned into a giant roadblock for many people.

It appears to be the issue du jour. First we will look at the financial institutional aspect to resubordination in an article from Bloomberg titled Bank of America, JPMorgan Face Mortgage Conflicts. Lets take a look -

[Bank of America Corp. and JP Morgan Chase & Co.] along with Wells Fargo & Co. and Citigroup Inc., the top four U.S. first-mortgage servicers, will face conflicts because they own $441 billion of second-lien home equity lines and loans along with overseeing $6.1 trillion of home loans, mostly for other investors or guarantors, Amherst’s Laurie Goodman and Roger Ashworth wrote in a report yesterday.

The conflict is just one of several for servicers created by the plan intended to stem the U.S. housing slump, according to the New York-based analysts. These conflicts may harm mortgage- bond investors. By locking borrowers into lower payments they’ll be unlikely to give up soon, the companies also can boost the value of some of their servicing contracts sevenfold by extending their expected durations, they said in a report last week.

“Clearly, with housing values continuing to decline in many areas, a performing first lien likely will benefit both the first-lien and second-lien holders” because foreclosures or short sales often occur without modifications and those often wipe out second loans, Rick Simon, a spokesman for Charlotte, North Carolina-based Bank of America, wrote in an e-mail.

The Obama plan, which offers “fairly clear-cut guidelines” on what should be done with first mortgages, “does nothing to benefit the second lien beyond attempting to provide a framework that allows the first lien to perform and get paid, perhaps allowing the second-lien holder to get paid at some time in the future,” he added.

Other issues related to home-equity loans, also called second mortgages, may also impair the modification plan. The congressionally appointed panel overseeing the U.S.’s $700 billion financial-company bailout, led by Harvard Law Professor Elizabeth Warren, said in a March 6 report that one of the plan’s flaws was that it didn’t “more fully address the contributory role of second mortgages in the foreclosure process, both as it affects affordability and as it increases the amount of negative equity.”

The Treasury Department says on its Web site that, “while eligible loan modifications will not require any participation by second-lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program, in order to reduce the overall indebtedness of the borrower and improve loan performance.”

That is the business side of resubordination. Now lets look at an article from the WFTS ABCNews located in Tampa Florida titled Want to Refinance? Not so fast, many are learning. Lets take a look -

Home equity lenders are throwing roadblocks in front of their clients who want to refinance their primary mortgages. In some cases, they delay refinances for a month or more. In other cases, they block homeowners from refinancing altogether -- all because of something called "resubordination."

A bank's refusal to resubordinate can be costly to the homeowner. Caleb Shaffer has two mortgages on his duplex in Oakland, Calif. Both loans are with SunTrust. A credit union offered to refinance the primary mortgage at a lower rate, saving roughly $250 to $300 a month. Shaffer says he couldn't go through with the refinance because SunTrust refused to resubordinate the second mortgage. SunTrust has received $5 billion in TARP funds from the federal government, or $34.13 for every working American.

Shaffer says he was told that he could refinance with SunTrust, but not with another lender. "They're saying their policy is they don't subordinate unless it's within the family of SunTrust," he says.

SunTrust offered to combine his two mortgages and refinance them into one loan. But if the loans were combined, he would end up with a higher-rate jumbo mortgage with much higher monthly payments. The point of getting two mortgages, of $500,000 and $100,000, was to avoid getting a jumbo loan with its higher rate.


You would think that a home equity lender would welcome a refinance of a primary mortgage if the refi results in a lower monthly payment. But from the equity lender's perspective, the optimal outcome would be for the borrower to pay off the equity loan and close the account. "They probably figure if they play hardball, they'll get paid off," says Matt Hackett, underwriting manager for Equity Now, a mortgage bank headquartered in Manhattan.

Jeff Lazerson, president of, an online brokerage based in Southern California, says equity lenders want borrowers to close their accounts, "because then they can get the cash back that was in the account, and their balance sheets look better."

So obviously lenders want the HELOC and HELs closed - but paid off not extinguished. Just like Homer learned, the house does not get stuck with the HELOC - you do. And it can get you in trouble as well.

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