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Our Second Mortgage Company Won't Subordinate Its Loan

I want to refinance our first mortgage, but the second mortgage holder won't subordinate. What can we do?

We found a company that will refinance our first, but the second lien holder will not subordinate without a full appraisal. We have already paid them $150 and they won't return it even though they didn't do the subordination. What department within the second mortgage company would we write to request a loan rate reduction? If they refuse to reduce the interest rate, what other recourse would we have? Can we offer a settlement of 10 cents on the dollar? I noticed several other people in your comments have been able to do this. We live in Colorado.

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Updated: Oct 21, 2014

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As part of its efforts to stimulate the US economy in 2008 and 2009, the Federal Reserve lowered interest rates to record low levels, which in part allows banks to offer some attractive rates to homeowners applying for a new mortgage or mortgage refinance.

Refinancing When the Loan Balances Exceed the Property Value

Although many current homeowners would like to refinance their home loans to take advantage of the low interest rates, the downturn in property values has resulted in many owing second mortgages or home equity loans that push their total current financing perilously close to, if not over, the actual values of their homes. In this situation, a refinance lender is unlikely to loan the homeowner enough money to combine the first and second mortgages into a single obligation, as the lender does not want to extend a loan that exceeds the value of the property securing debt.

The refi lender may be willing to refinance the first mortgage, but only if the lender holding the second mortgage or home equity loan is willing to give the refi lender's encumbrance on the property seniority over the second mortgage.

Allow me to travel on a momentary tangent regarding legal terminology. In Colorado, California, Texas and 18 other states the "mortgage" is actually a "deed of trust." Legally, the two are different, but a comparison of the two exceeds the scope of this discussion. Although it is inaccurate technically to call a Colorado home loan a mortgage, we will continue to refer to the first and second loan on the property here a mortgage because that is expected and understood by our non-property lawyer readers.

Subordination

Getting back to the subordination issue, without such an agreement, the second mortgage, as the older debt, would become the senior encumbrance on the property once the refi lender pays off the first mortgage as part of the refinance.

Unfortunately, unless you have a significant equity cushion, the bank holding your second mortgage loan is likely to refuse to agree to subordinate its encumbrance, especially if you are planning to "cash out" any of your equity by borrowing more from the refi lender than you currently owe on the first mortgage.

The secondary lender's position is already relatively weak in terms of its ability to enforce its security interest in the home, since it would be required to either pay off or otherwise receive the first mortgage lender's consent to proceed with foreclosure. Given its already tenuous ability to force repayment, the secondary lender is unlikely to agree to subordination to a "cash out" refi loan, which would eat up the small amount of equity to which it may be able to lay claim in case of default.

On the other hand, if you can show the second mortgage holder that the refi loan will actually reduce the risk of default on your home loans by reducing your total mortgage payments each month, you may find the secondary lender more willing to cooperate with you and the bank providing the refinance loan.

Consult with the agent handling your potential refinance loan, as well as any other mortgage professionals you know, to discuss the best way to present your plan to the second mortgage lender. The key is making the lender believe that the refinance loan and required subordination will ultimately serve its interests.

Appraisal by Second Mortgage Company

In your question, you state that your second mortgage company has requested a full appraisal of your property before it will consider agreeing to subjugate its encumbrance to that of the company through which you are trying to refinance your first mortgage.

First, you should understand that demanding a complete appraisal of the home's value is not unusual. The second mortgage company wants to determine how much equity you currently have in the property (the more equity, the more likely junior encumbrances will be paid in case of foreclosure), and how the proposed refinance loan will affect this equity cushion. It will also want to determine if you are "upside-down" on the property (you owe more that the home is worth), as being in this position significantly increases the possibility that you will default on one or all of your mortgage obligations.

Here, it sounds like the lender has refused to subordinate, and refused to refund the appraisal fee paid. Unfortunately, I do not think that you have much recourse in this regard, as appraisal fees are usually non-refundable.

However, if you think that you were mislead by the lender, you may want to contact the Colorado Dept. of Real Estate and the Colorado Attorney General’s Office to file complaints against the lender. While these agencies cannot guarantee you a favorable outcome, they are often successful in mediating disputes between consumers and businesses.

Loan Modification

You are correct in pointing out that a Bills.com reader reported that a second mortgage holder made a lump-sum settlement with a homeowner for 10 cents on the dollar. Keep in mind that there are dozens of companies making second mortgage loans, and hundreds of thousands of second mortgages under contract. Your lender may not offer such attractive settlement terms.

As for what department at the second mortgage company you need to contact to discuss the possible modification of your loan terms (payment amount, interest rate, loan term, etc.), you should probably start by contacting the general customer service department. They may help you directly, but a good CS agent should be able to point you to the correct department (probably named something like "loss mitigation," though this will depend on your specific lender).

To read more about refinance loans, I invite you to visit the Bills.com home refinance page. I wish you the best of luck in your efforts to refinance your current mortgage loans, and hope that the information I have provided helps you Find. Learn. Save.

Best,

Bill

Bills.com

8 Comments

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  • RK
    Jul, 2013
    Rob
    I'm approved for a HARP loan on my 1st and my 2nd (HELOC) has agreed to subordinate however they are making me do a Modification Agreement and and my payment will go up on the 2nd - which I had to get re-qualified for the HARP loan again. I know they don't have to subordinate but my question is it legal for them to modify my 2nd to put me in a worse position? Is there a course of action to fight this? Seem real shady to me...
    0 Votes

    • BA
      Jul, 2013
      Bill
      I need to know the reason your lender gave you regarding why your new payment is higher. Did you ask them? Does the new loan have a shorter term, for instance, or were you paying only interest before?
      0 Votes

  • LM
    Aug, 2012
    Lisa
    1st Mortgage is held by the same as 2nd mortgage. 1st says they cant subordiante the 2nd cant fine deed? im confused..our 1st and 2nd have been with the same bank since 2000..they have stopped the process trying to find deed? say they are making progress but original paperwork was not processed...what do i do?
    0 Votes

    • BA
      Aug, 2012
      Bill
      Surprisingly, banks are lousy record keepers of paper files.

      You did not mention your bank's name. If it is a national bank, then the two loans are handled by different offices, which are probably not even in the same state.

      You asked what to do. If your lender cannot find any legal documentation to establish the right to collect on your loans, consult with a lawyer in your state who has experience in property law. Ask him or her about your rights, and whether you should consider filing a quiet title action to resolve the situation.
      0 Votes

  • TA
    Jun, 2012
    Thomas
    The following legal link claims that under the legal doctrine of "conventional subrogation", an agreement between the new 1st mortgage lender and the borrower that the new loan is replacing the previous 1st mortgage, is sufficient to keep all other intervening liens in subordinate positions as long as the new loan is no more onerous than the old loan (i.e., no cash-out or higher rates) : Daily Development for Thursday, May 7, 1998.

    If that is correct then why are 1st mortgage companies requiring the 2nd mortgage holder's agreement?
    0 Votes

    • BA
      Jun, 2012
      Bill
      Not all states follow the doctrine of conventional subrogation. As implied in the article you cited, many states follow the doctrine of equitable subrogation.
      0 Votes

  • SB
    Nov, 2011
    Sandor
    I have run into the situation whereby my Home Equity Lender will not re-subordinate and accomodate my refinance. In this case my refinance will be a lower loan amount, a lower monthly payment and will convert an interest only loan to an amortizing loan. I have also expressed the ability to slightly reduce my Home Equity Line. The appraised value of the combined loans will be 80% and the original home equity loan was made at 86%. Have you heard of anything so absurd? Do you know of anyone attorney's taking on law suits in this instance. Obvious damages would be lost equity of the term and the lossed opportunity to reduce monthly payments.
    0 Votes

    • BA
      Nov, 2011
      Bill
      By all means, consult with a lawyer who has real property experience.
      0 Votes