With mortgage rates now at historical lows, and many homeowners still digging out from the financial crisis that struck five years ago, the benefits of refinancing, for these individuals and for the economy as a whole, seem obvious and desirable. According to the Federal Reserve Bank of Philadelphia, however, 23.5% of homes in the country were encumbered by more than one mortgage in 2012. For folks who want to refinance, having that second mortgage (which will typically secure a home equity loan) complicates things. Why? Because in New Jersey, as in many jurisdictions, the second mortgage holder is legally entitled to move into first place when the first mortgage is refinanced. So the home equity lender would have to agree to "stay put", in second position, in order for the refinancing lender to occupy first position on the property. This is called subordination (or, in some circles, resubordination). What 's involved? Before it can refinance your primary mortgage, a lender must submit a package of documents - - a subordination package -- to the lender holding your home equity loan or line of credit. Hopefully, the second mortgage holder will agree to subordinate. If it does not, however, the homeowner is left with the choice of paying off the second mortgage (but he may not have the cash), consolidating both loans (which also may not be doable) or foregoing the refi altogether.
Note that even if the second mortgage holder is ultimately agreeable to the request, subordination costs time and money. The borrower can be required to pay subordination and rate-lock fees and the response from the second mortgagee can sometimes take up to six weeks. Can anything be done about this? The State of Maryland answered this question last month by enacting SB 199, which authorizes a mortgagor to refinance the full balance of a loan secured by a first mortgage or deed of trust without the permission of the holder of a junior lien if (i) the principal amount secured by the junior lien does not exceed $150,000, and (ii) the principal amount secured by the refinance mortgage does not exceed the unpaid outstanding principal balance of the first mortgage or deed of trust plus closing costs up to $5,000. Under these circumstances, the refinanced mortgage or deed of trust, upon recordation, will have the same lien priority as the replaced first mortgage or deed of trust. The law takes effect on October 1, 2013 and applies to refinance transactions after that date. It is nearly identical to a Virginia law enacted in 2000 and amended most recently in 2011. These laws would appear to represent a carefully calibrated and sensible approach to removing a major roadblock to refinance for many of these states’ homeowners. If Virginia and Maryland can answer the call, why can't we?