Resubordination Issues

Many people have both a first mortgage and a HEL, HELOC or piggyback loan. This large group is running into problems when they decide to refinance to a lower rate. But the lenders are refusing to resubordinate the loans thereby making the refinance issues harder. In the Washington Post today an article titled Getting Around a Lender Who Won't Subordinate outlines the issues very succinctly. The information supplied is in reply to a letter from a homeowner who has a $417,000 first loan that they want to refinance, a $77,000 second mortgage and who put down 10% at time of purchase. Let's take a look -

The line of credit is a second deed of trust (mortgage). That means that it was recorded in second place behind your first mortgage. If you pay off the first mortgage with your refinance money, the credit line moves up to first-place position.

No lender will refinance your main home loan and accept second place. Accordingly, many credit line lenders will agree to file a document among the land records that states that they agree to accept second place behind the new lender. That document is called a subordination agreement.

There is no legal reason why any credit line lender must agree to subordinate. In fact, many such lenders have started to either restrict the amount of money that can be tapped from their loans or have canceled them outright. Why? Because as the equity in your home decreases, their security becomes threatened.

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Have you or your refinance lender talked to that lender? Have they given you any valid reason why they do not want to subordinate?

Talk with your proposed new lender. Ask whether they make credit line loans. If so, you can refinance, get a new first mortgage as well as a new line of credit, and pay off the old lender.

Of course they would like their line paid off and closed out. In this current economic environment it only makes sense. It would be interesting to see some statistics on this rather than just the anecdotal stories we come across.