What is a subordination?

Subordination is when a borrower has 2 loans, and you are only doing a refi on the first, therefore leaving the second mortgage in place. When the market was booming, banks were giving out second all day long. These days, there are very few banks that will offer a second, and the ones that do, are very strict guidelines. Back in the heyday, 80/20 loans were one of the popular items. Well now, those seconds are hurting borrower’s chances of doing a refi. What you are seeing is borrowers trying to do a refi on their first mortgage, and subordinate the second. The way it works is, your broker would request the subordination requirements from the second mortgage holder. The requirements are usually; 1003 (which is a residential mortgage application), title work, the subordination worksheet completely filled out, and an appraisal, plus a fee between $150-$250. If an appraisal is not available, the banks will usually take an AVM. An AVM is an automated valuation model. It is a computer generated appraisal.

What we are seeing these days is, banks processing subordinations are taking as long as 60 days!! This is where you need to be careful regarding your lock on the first. The first mortgage could be approved, waiting only on the subordination approval, but if the second bank takes 30, 40 or 60 days, your rate that is locked on the first may expire. You would then need to buy an extension or if you got lucky and the rates were the same or lower, you could re-lock it at the same rate or better. I think this is very risky. If you have a second, you need to seriously look at a 45 day lock or even a 60 day, depending on which bank holds the second. We are seeing this with the new HARP program. The HARP program is the one letting people borrow up to 105% of the loan-to-value, and they will NOT let you payoff the second. You must subordinate a current second mortgage. Here is a caveat that I don’t like…the HARP program says you can have a second mortgage with an unlimited CLTV, Combined-loan-to-value. What no one says is that the second bank never agreed to an unlimited CLTV. They will review each subordination and decide whether to approve it or decline it. If it is declined, your refi is done. The bank doing a refi on the first mortgage will not approve the loan with a subordination declined.