Housing Counsel: Getting Around a Lender Who Won't Subordinate

By Benny L. Kass
Saturday, May 2, 2009

Q: My wife and I purchased our home a couple of years ago, with 10 percent cash down, a $417,000 first mortgage and a $77,000 home-equity line of credit. We would like to refinance our first mortgage to take advantage of today's low interest rates, but the holder of our line of credit refuses to subordinate. We feel this is unreasonable. After refinancing, the payments on our first mortgage would be reduced significantly; with the lower payments, we are less likely to default, thereby making the lender's position more secure. Our home has appreciated slightly, so we cannot understand why the lender would believe they would be in a worse position. Is there anything that can be done when a lender unreasonably refuses to subordinate a line of credit?

A: In today's difficult economy, lenders have tightened their loan requirements.

Let's look at what subordination involves. You have a first trust of $417,000 and a home-equity line of credit for $71,000. You put down 10 percent, so by my calculations you paid about $550,000 for your home.

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.

You say your home has appreciated slightly. If, for example, it is now appraised at $560,000, and the new loan will also be $417,000, you are correct that the credit line lender will have a little more security than it has now.

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.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.

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