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04/13/09: Lender Will Not Subordinate

Housing Counsel

By Benny L. Kass

Q: My wife and I purchased our current home a couple of years ago, with 10% cash down, a $417,000 first mortgage, and a $77,000 home equity line of credit (HELOC). We would like to refinance our first mortgage to take advantage of today’s record low interest rates, but the current holder of our line of credit refuses to subordinate. We feel this is unreasonable because they would be in a better position after the refinance than they are now. 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 any worse of a position than they are now. 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 up their loan requirements.

First, let’s explain subordination. You have a first trust of $417,000 and a HELOC for $71,000. You put down 10 percent, so by my calculations you paid approximately $550,000 for your home.

The word HELOC is short for “home equity line of credit”. Call it what you will, but it 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 with your refinance money, the HELOC then falls into first place position.

No lender will refinance your home and be in second place. Accordingly, many HELOC lenders will agree to file a document among the land records where your house is located, that simply states: “we are now in second place behind the new lender.” That document is called a “subordination agreement”. An online dictionary defines this as “to make subject or subservient, or to treat as of less value or importance.”

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

In your case, 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 HELOC lender will have a little more security than it currently has now.

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

My suggestion: talk with your proposed new lender? Do they make HELOC loans? If so, you can refinance, get a new first mortgage as well as a new line of credit, and pay off the old HELOC lender.

I encourage everyone to have a line of credit loan. You do not pay any interest until you start using the line; if you ever need money immediately, the check book is in your drawer.