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[00:22] Who Needs to Know This
[00:45] Lien Position
[01:24] Why Lien Position Matters
[02:13] When Subordination is Needed
[02:58] Subordination Agreement
[04:10] Subordination Process
[05:09] Steps in the Subordination Process

In order to understand how SUBORDINATION works, first we need to understand the concept of LIEN POSITION

When a property has multiple liens, such as in the case of a home mortgage loan and a home equity line of credit, the Liens are prioritized in order of when the lien was recorded
A lien that was recorded first is considered a "Senior lien" and any liens recorded after that are considered "Junior liens"

In the event of foreclosure or bankruptcy, if the property has to be sold, the proceeds from that sale that are used to pay off the creditors are paid in order of lien position. So the SENIOR LENDER GETS PAID FIRST and then if there are any proceeds leftover, then the first junior lien holder will get paid, and so on.

After the senior lender has been paid. If there aren't enough proceeds to satisfy the lien for the junior lender, the lien is extinguished and the junior lien holder needs to pursue other means to collect from the borrower.
This is the reason why second mortgages usually have a higher interest rate than a first mortgage, because the second lien holder needs to be compensated for the higher risk due to their junior lien position.

Subordination comes into play when a borrower wants to refinance their first mortgage after a second mortgage or a home equity line has been put in place.

Let's use an example of a homeowner who takes out a 30 year fixed rate loan. Then a couple of years later, they take out a home equity line of credit.

After a few years, the borrower wants to refinance their 30 year loan with a new loan, because say interest rates went down.

If the borrower wants to refinance their original loan, then the new loan would technically now being junior to the home equity line of credit.

Typically, the new lender is not going to want to take a junior position when refinancing the original senior loan.

So what they do is when they go to pay off this loan, they have the junior lien holder sign a SUBORDINATION AGREEMENT that effectively takes the junior lien and puts it junior to the new loan, which now becomes the senior debt.

Most subordination agreements are pretty seamless and standard. People refinance their mortgages all the time. So junior lenders or home equity lenders are quite accustomed to subordinating to that new senior debt.

If they refused to subordinate, people would either be more hesitant to borrow from these lenders who are in the business of making loans, or they would get paid off by the borrower and then they would be forced to go find a new borrower to redeploy that capital. It actually serves them better to subordinate to the new senior loan so they're back in the same position that they were before, and they're still earning that higher rate of interest that they were

Oftentimes, when a subordination is happening, if the original lender and the home equity lender are the same institution, the borrower doesn't even really know what's happening until they're required to sign the subordination agreement along with the lenders at the closing of the refinance.

However, it's quite common that the new lender and the home equity line of credit lender are different. In that case, the two institutions will have to collaborate on the subordination agreement and work together to draft the paperwork.

Some lenders might charge a subordination fee or other fees, or possibly even require a new appraisal.

When those two lenders are different companies, quite often delays can occur. So it's important as a borrower to understand that a subordination agreement needs to be signed and help make sure that that process goes smoothly by communicating with both lenders and making sure that they're aware of what their responsibilities are.


Sample Subordinatiion Agreement: https://bit.ly/2XP3PzA

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