Wednesday, April 15, 2009

Second Mortgage Subordination

As I wrote about last week, 2nd mortgages are gumming the works for Obama’s Making Home Affordable program.  Second lien holders have to agree to subordinate their loans to the new firsts in refinancing.  And in many cases they aren’t, or are not making it easy.  The Administration was scrambling to correct this egregious oversight.  

But homeowners in Virginia have their state government to thank for a partial solution.  During the year 2000 legislative session, the General Assembly enacted a statute that, if certain conditions are satisfied, makes subordination automatic.

The most salient conditions include:  the original second mortgage must be for $50,000 or less.  The property is residential and contains no more than one dwelling unit.  The original deed of trust being refinanced was recorded prior to the subordination deed of trust.  The refinance mortgage amount is not more than $5000 than the current balance of the original mortgage.  And the interest rate of the refinance mortgage does not exceed the rate of the replaced mortgage.

The situation must meet all of these conditions and others, as well.

So this automatic process only applies to rate and term refinancing, not to cash out.

But thanks to Virginia Code § 55-58.3, subordination can happen in these instances without the lengthy delay it would otherwise entail.  A good lawyer can do it at closing.

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