Second Trust Deeds and Loan Subordination
When you have more than one loan on your property, there are some issues you should be aware of. Keep in mind the fact that some states still use the mortgage system, requiring court action to foreclose, as opposed to Deed of Trust, which does not. For practical purposes they are similar, yet I have never done significant work in a mortgage state so there may be small but significant differences.
Each loan is secured by a different Deed of Trust. Two loans, two Deeds of Trust. A Deed of Trust is a three way contract between the borrower (called the trustor), the lender (called the beneficiary), and a third party known as the Trustee, to whom title is nominally conveyed for purposes of selling the property if you default on the loan. The Trustee and the Beneficiary are often the same, and there while there is no legal impediment I'm aware of to the Trustor and Trustee being the same, I also cannot imagine a lender agreeing to it.
Trustees can be changed, and this is accomplished via a document known as "Substitution of Trustee," which is required to be recorded with the appropriate county in every state I've done business in.
Each Trust Deed operates independently of all others there may be against a given property. They take priority in order of date. When a Trust Deed is recorded against an property on which there already is an active Trust Deed, it automatically becomes a Second Trust Deed, if another happens it is a Third Trust Deed, and so on.
The reason they have the ordinal is because they are paid off in the order they happened. Suppose the property is sold, and the sale price is not sufficient to pay all of the debts. The trust deeds are not paid proportionally; The First Trust Deed is paid off in full before the holder of the Second Trust Deed gets a penny. Then the Second is paid before the third, and so on. This is why Second trust Deeds carry higher rates than First, because they are riskier loans for the lender. As I've said elsewhere, just because the property is sold doesn't mean you're clear. If there is not sufficient money from the sale to pay all debts, you can expect the lender to hit you with a form 1099, reporting that you have income from debt forgiveness, and you will be expected to pay taxes on it.
Now, if for whatever reason you pay off your First Trust Deed, the Second automatically goes into the first position, and any subsequent loan goes into second position. This is most common when people go to refinance the loan secured by their First Trust Deed. Even if you do not particularly want to pay off your Second Trust Deed, it may be the best thing to do. Because what happens if you just pay off the First Trust Deed (only) and get a new Trust Deed, is that the new Trust Deed will go into the second position. Unfortunately, in order to get the quoted rates for a primary loan, it is a requirement that the loan be in first position. If it's not in first position, they will not actually fund it. In short, no loan.
This is not necessarily an impasse. Many times, the holder of the second trust deed, because their loan was priced to be second in line anyway, may agree to Subordinate their loan to the new loan, which is a fancy way of saying stand in line behind the new trust deed holder.
They don't have to do this, and there is no way, other than paying off their loan in full, to force them to do so. Some companies never subordinate, while some others are never willing to stand second in line at all, and others are in both categories.
For those that will consider it, they are going to stipulate some conditions. First of all, the new loan is likely going to have to put the borrower into a position where it is easier, or at least no more difficult, to make payments and pay off the loan. So monthly payment usually cannot rise.
Second, they are going to want their trust deed to be in no worse of a position than it was when the loan was originally approved, as regards the value of the home being able to pay their loan off too if for some reason either loan is defaulted. They may even require than you agree to a higher rate, higher payments, or a different loan altogether - as I said, there is nothing you can do to force them to cooperate.
Assuming that they are willing to cooperate, they will require that the entire process on the prospective new loan be essentially complete - that is, ready to draw documents and fund when the Right of Rescission expires after three days, before they will even look at it. Some lenders take 48 hours to look at a subordination request, others take up to six weeks, and it can be even longer. For any given lender, it takes as long as it takes.
There is also going to be a fee involved. They have to pay their people to look at the loan situation and make certain it still falls within guidelines. They're the ones doing you the favor, they certainly are not going to do the favor for free. Whether the Subordination request is evenutally approved or not, the subordination fee is likely to be non-refundable, a sunk cost that you are not going to get back even if it's not approved.
Even more important than that, however, subordination takes time. No loan quote is real unless locked, all locks are for a specified period of time, no lock is good past the original period of time unless you pay an extension fee, and if you need to lock for a longer period of time in order to subordinate, either the rate, the cost, or possibly both will be higher. Since this can add anywhere from two days under idea conditions to six weeks or more for a refinance that takes three weeks to get approved and get funded in the best of times, this means a longer lock period becomes advisable. Most often, the extra costs mean that it's more cost effective to just pay off both loans rather than subordinating the second to the new loan.
Since Home Equity Lines of Credit are always secured by a trust deed, they count as any other second mortgage would. You'd be amazed how often people do not disclose Home Equity Lines of Credit even when directly asked about them. They are only hurting themselves, but they often get angry to no good purpose when, if they had been upfront about them, the loan officer could have designed around any difficulties. Furthermore, people are often resistant to the idea of paying off and closing Home Equity Lines, despite the fact that they are easy to get. I've had people stonewall, utterly in denial that this is a Deed of Trust opon their residence until I have the title company fax me a copy of the Trust Deed, and reference it with the Preliminary Report, and ask to see the Reconveyance (which is a fancy way of saying the piece of paper proving that the trust deed has been paid off). If it's a legitimate lien, we have to deal with it. Actually, we have to deal with it if it's not a legitimate lien as well, just in a different manner. On the other hand, about eighteen months ago I had some seasonal resident clients whose ex-caretaker had managed to take out a loan against the property. It does happen, and it's a mess, but most times it's just the people themselves who weren't told - and didn't figure out - that this financing agreement they signed for the pool or air conditioner or roof was a second trust deed on their house.
To summarize then, second loan means second trust deed, if you refinance they must be paid off or subordinated, and subordination takes time such that it may be better to pay it off than go through the rigamarole of subordination.
Caveat Emptor.
Categories
Mortgagesblog advertising
--Blogads--
blog advertising --Blogads--
My Links
-
Heavy Lifters
- Instapundit
- Michelle Malkin
- Scrappleface
- Volokh Conspiracy
- Captain's Quarters
- Wizbang
- Victor Davis Hanson
- Eject! Eject! Eject!
- Michael Barone
- The Victory Caucus
- The Truth Laid Bear Places I get to as often as I can
- The Command Post
- Good News Central
- Icerocket
- Life Liberty Property
- MEMRI
- Raging RINO Community
- Technorati
- Transparency International
- Wide Awakes
- The Anchoress
- Argghhh! R
- Armies of Liberation R
- Asymmetrical Information
- Austin Bay
- Belmont Club
- Big Lizards
- Tim Blair
- Cox and Forkum
- Dr. Sanity
- Kevin Drum
- Gateway Pundit
- Hugh Hewitt
- Iraq the Model
- Jeff Jarvis
- Jihad Watch
- John Leo
- Lileks Screed
- Little Green Footballs
- Josh Marshall
- Mudville Gazette
- Neo-neocon
- WSJ OpinionJournal
- Politburo Diktat R
- Powerline
- Powerline News
- Protein Wisdom
- Q and O L
- Real Clear Politics
- Mark Steyn
- Stop the ACLU
- Strategy Page
- Don Surber R
- Vodkapundit
- Watching America
- Matthew Yglesias
- Michael Yon Personal Finance, Economics and Business Sites
- Bloodhound Blog
- Consumerism Commentary
- Eidelblog L
- The Entrepreneurial Mind
- Finance Blog
- Financial Rounds
- Free Money Financea>
- In Cash Flow We Trust
- I Will Teach You To Be Rich
- Mortgage Fraud Blog
- No Credit Needed
- Old Niu's Blog
- Pacesetter Mortgage Blog
- Personal Finance Advice
- pfblogs.org
- Social Security Choice
- Students for Saving Social Security Other sites I've linked and visit
- Accuracy In Media
- Ace of Spades
- The Agitator
- All Things Jennifer R
- Ann Althouse
- American Citizen Soldier
- The Anarchangel L
- Angry in the Great White North L
- Antigravitas L
- The Anti Idiotarian Rottweiler
- Art of the Blog R
- Atlas Shrugs
- aTypical Joe R
- Professor Bainbridge R
- Baldilocks
- Barcepundit
- Beldar
- Belgravia Dispatch
- Below The Beltway L
- Blackfive
- The Buck Stops Here
- Catallarchy L
- Chapomatic
- Chequer-Board of Nights & Days
- Clarity and Resolve
- Classical Values R
- Combs Spouts Off L
- Common Sense and Wonder
- The Counterterrorism Blog
- Countertop Chronicles R
- Coyote Blog
- Daily Howler
- Daily Pundit R
- David's Medienkritic
- Dean's World R
- Decision '08 R
- De Doc L
- Brad DeLong
- Democratic Peace
- Different River
- Digger's Realm R
- Done With Mirrors R
- Drink This
- Drudge Report
- DUmmie FUnnies
- enrevanche R
- Eschaton
- Evolution R
- Fearless Philosophy L
- Forward Biased L
- Generation Why?"
- Happycrow's Eyeball Factory L
- Hold The Mayo L
- Huffington Post
- The Idiom
- IMAO
- INCITE L
- INDC Journal R
- Inside Larry's Head R
- Inoperable Terran
- Iowahawk
- It Comes In Pints?"
- The Jawa Report R
- Just One Minute
- Justus for All R
- Kausfiles
- Ezra Klein
- Daily Kos
- La Shawn Barber
- Liberals Against Terrorism
- Libercontrarian RL
- Libertarian Leanings R
- Liberty Papers
- Carol Platt Liebau
- Llama Butchers R
- Mensa Barbie
- The Moderate Voice
- Mossback Culture R
- Mover Mike L
- Mr. Completely L
- National Review Online
- No Angst Zone L
- Normblog
- Brendan Nyhan
- Ogre's Politics & Views L
- One Fine Jay R
- Owlish Mutterings L
- Patterico's Pontifications
- Peter Porcupine L
- Bradford Plumer
- Pole Dancing In The Dark L
- Political Calculations
- POV R
- Publius Pundit
- Radio Equalizer
- Reasoned Audacity
- Respectful Insolence R
- Rhymes with Right L
- Riehl World View
- Right Place
- Right Reason
- Right Thoughts R
- Right Wing Death Beast
- Right Wing Nut House
- ROFASix
- Samizdata
- Say Uncle RL
- Debbie Schlussel
- SCOTUS Blog
- Roger L. Simon
- The Strata-Sphere R
- TacJammer
- TalkLeft
- TAPPED
- Target Centermass L
- Technography R"
- Tempus Fugit
- Texas Best Grok L
- Tigerhawk
- Link Text
- Tinkerty-Tonk R
- Tom Rants RL
- Unalienable Right
- Uncommon Insanity L
- Unrepentant Individual L
- Villainous Company
- Oliver Willis
- Willisms
- The World According to Nick R
- World Wide Rant R Link Exchanges, etcetera
- But That's Just My Opinion
- Condo Buzz NYC
- Crazy Rants of Samantha Burns
- DANEgerus R
- A Dollop of Sour Cream
- Dust My Broom L
- Generic Confusion R
- Grim's Hall
- Heartless Libertarian L
- individ L
- Kesher Talk R
- Leaning Toward The Dark Side R
- Libertopia L
- Liberty Corner L
- Medary L
- Mondo QT L
- Nose On Your Face R
- Pererro R
- Pratie Place
- Random Fate R
- Ravings of John C. A. Bambanek L
- Signifying Nothing R
- The Skwib L
- Tel-Chai Nation
- TF Sterns Rantings L
- DC Thornton R
- Wake Me Up On Judgement Day R
- Windypundit L Consumer and Research Sites
- Better Business Bureau
- Consumer Reports
- NASD Home
- California Department of Real Estate
- California Licensee Lookup
- California Department of Insurance
- National Association of Insurance Commissioners (NAIC)
- Do Not Call Homepage
- IRS Charities Search
- Internet Fraud Complaint Center
- SEC Home Page
- Stop Mortgage Fraud
- Report Mortgage Fraud Debunking Many so-called Real Estate Gurus
- John T. Reed Other research
- FactCheck.org
- Babel Fish Translation
- Snopes Worthwhile Web Comics
- Sluggy Freelance
- Day by Day
- User Friendly
- Kevin and Kell It is site policy to list the main page of every site I reference. Sometimes the real world intervenes and I haven't gotten to it yet, or one falls through the cracks on a long post with multiple references. It is also site policy to list the main page of every site that lists this one on their equivalent roll, as well as the main page of all sites that are members of any of the same groups this site is a member of. Please send me an email with a link to the main page of your site if I've overlooked you (dm at the domain name). For the clue-challenged, note that it is a requirement for your link to appear on every page of your site, just like mine does, and I will not link to spam sites. Honor Roll of Sites Banned by Paranoid Repressive Governments: (be the first on your block to submit a link!)
Requests for reprint rights, contact dm (at) searchlightcrusade (dot) net! Subscribe to Searchlight Crusade
C'mon! I need to pay for this website! If you want to buy or sell Real Estate in San Diego County, or get a loan anywhere in California, contact me! I cover San Diego County in person and all of California via internet, phone, fax, and overnight mail.
**********
Contact me! dm (at) searchlight crusade (dot) net (Eliminate the spaces and change parentheticals to the symbols, of course)
Leave a comment