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HOMEOWNERS SEEKING RE-FI: 2nd Mortgage Now Harder to Subordinate!


When the housing market was strong, and steady and predictable home appreciation almost always assured, getting a refinance loan for most home borrowers was easy.  Here in Chicago, for many of our clients, buying the home with both and a first and second mortgage, to avoid hefty Private Mortgage Insurance charges, and then quickly refinancing into an attractive-rate fixed or adjustable rate loan for the combined loan value, was common.

Now, this is a bit tougher!   Many borrowers, now facing high adjustable rate loan resets, are having trouble shedding the original loan through a refinance.

Let's say, for example, you purchased your home a few years ago for $325,000.  In order to buy, you took out a $260,000 first mortgage loan, plus an immediate second mortgage loan, at a higher rate, for an additional $32,500.  PMI was avoided since your loan to value on the first loan was 80%.  Since you took out an immediate second mortgage, your actual loan-to-value, in total, was 90%.  For this exercise, let's assume the property now appraises at $335,000 - 3% higher than when the house was purchased.

Assuming your current mortgage balance is $258,000 on the first loan, your lender is eager to grant you a refinance loan since the new LTV for that loan alone will be 77%.  But adding the second mortgage, most likely still at $32,500 if it was an interest only loan, brings your total LTV, for both loans, to over 86%.

The lender holding the SECOND mortgage, seeing increased risk if the property declines in the future, may be unwilling to subordinate their loan to the larger, new first mortgage.

One major mortgage lender, National City Bank of Cleveland OH, on February 18th, sent out a directive to its loan officers nationwide not to subordinate second mortgage loans unless the FIRST mortgage was also with National City.  Other banks are likely to follow their lead.

There is a business reason for their decision.

When a bank agrees to subordinate their loan, they are placing themselves in second position in the event of a borrower's default, should foreclosure occur.  Should property values decline, and the borrower stops paying on his loan, and cannot sell his property, the first lender would get the lion's share of the foreclosure proceeds should the property revert to the bank.  Typically, the second lender gets pennies on the dollar for their loan!

Independent Loan Originator Joseph Liberto. of Intermediate Mortgage of Ijamsville MD, vehemently disagrees with National City Bank's Position.  "Our [federal and state] governments are trying to help people facing big payment increases, and we've got lenders refusing to cooperate -- even when it makes sense for everyone involved," complains Liberto.

One option available to some borrowers is to refinance with enough cash out to pay back the original first AND SECOND mortgages.  But many cash-out loans are getting tougher to come by, and their rates may be substantially higher.

Please see Kenneth R. Harney's article in today's Chicago Tribune for more information.


Posted: Sunday, March 2, 2008 5:10 PM by Dean's Team


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