Summary:
Yes, the lien holder will subordinate. Is this statement true, or is it someone's fantastical illusion?
Many loan requests require a recorded instrument to be subordinated to the new recorded instruments.
It may be a false statement that another party will subordinate. Such misrepresentations can lead to significant time and resource wastage, underscoring the need for caution and thorough verification in real estate transactions. The potential fallout from such misrepresentations should be a stark reminder of the importance of due diligence in every transaction, making you feel the weight of your decisions and their responsibility.
Unless the mortgage broker verifies in writing the willingness of the principal parties to subordinate a lien, the entire process is a waste of everyone's time.
Article:
Subordinated Liens:
Certain loan documents are recorded using a sequential date and time-stamped method. The senior lien is the first in line of recording. In some cases, it is desirable or necessary to keep a first lien on the property but to agree to change its priority to a junior position. This is done using a subordination agreement. The debtor, original lender, and beneficiaries approve and sign the agreement. The trustor or borrower will allow the lien priority to be transferred to a subordinate (lesser) or junior position.
There are many reasons for the subordination of a document.
Reasons include:
- The seller carry-back lender (beneficiaries) desires to be partially paid off for tax deferral or cash flow reasons.
- The property equity may be too short to refinance and pay off all the underlying liens and encumbrances. The transaction will only work if one or more junior lien holders (lenders) agree to subordinate all or a portion of their loan, possibly taking a partial principal paydown.
- Certain encumbrances should be recorded but are adequately protected even in a subordinate lien position.
Real estate lending consists of representations from borrowers and mortgage brokers, but some of these facts are myths. The underlying question is whether some misrepresentations are intentional or out of ignorance. A seasoned processor or underwriter is best to practice healthy skepticism. Their role is to find the truth and guide the transaction accordingly, making you feel guided and supported in your decisions.
The expectation of an income stream characterizes income real estate ownership. Usually, the purchase requires financing. When an owner finances the property, a lien is recorded by the lender to secure the interest. A lien is a legal right, usually a security interest, in real or personal property given to a creditor to hold and possess as consideration for a loan. The creditor or lender has a charging interest against the collateral and may seek possession in the event of default by the borrower. A borrower willfully grants the security interest in real property by agreeing to sign instruments called a deed of trust or a mortgage, which are recorded in public records as an encumbrance to the real property in consideration for the loan. A lien is a monetary claim that may be attached to one or more properties.
Understanding lien priority is crucial in real estate transactions. It is related to the point in time that the document is recorded in the public records office. When a document is recorded, it is date-stamped and given a sequential recording reference number. This knowledge empowers you to understand the hierarchy of liens on a property, regardless of the dollar amount of each lien, making you feel empowered and in control of your transactions.
If you were to go to the recorder's office, stand in line, and have the documents recorded, you could check the recording sequence for yourself. What makes the recording the order? How do you know that the recorder did not make a mistake and recorded the documents out of order? You may order and pay for an insurance policy called title insurance. The policy guarantees your lien priority position or may be subjected to a title insurance claim. Generally, your documents are recorded by a title company about a sale or loan transaction in which you are a principal party.
What does this all have to do with subordination? The documents are recorded using a sequential date and time-stamped method. In many cases, keeping a lien on the property may be desirable or necessary, even though another lien is recorded after the original. This is done using a subordination agreement. The agreement is approved and signed by the original lender or beneficiaries, and the trustor or borrowers will allow the lien priority to be transferred to a subordinate or junior position.
There are various types of subordination agreements.
- Strat subordination agreements
- Subordination, attornment, and non-disturbance agreement.
- Subordination of a leasehold estate.
- Subordination and inter-creditor agreement.
Why is this information important? Imagine a scenario where a borrower or mortgage broker misrepresents that a lender will agree to subordinate, and you later discover that the lender refuses or has yet to decide to subordinate. This could result in a significant waste of time. This possibility should instill a sense of caution and attentiveness to every transaction detail.
When the question of a lender agreeing to a subordinate arises, the processor or underwriter's first responsibility is to contact the lender and verify in writing that they agree to subordinate under preconditions. This verification process, handled by experienced professionals, is a crucial step that can prevent potential time wastage and ensure the smooth progression of the transaction.