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August 30th, 2013

Maryland enacted a new "Automatic Subordination for Junior Mortgages" statute will take effect on October 1, 2013.

The statute (SB 199, Chapter 205 of the 2013 Laws of Maryland) provides that a mortgage or deed of trust (collectively "mortgage") on residential property which refinances, in full, a First Mortgage at an interest rate lower than the First Mortgage will, upon recording, have the same lien priority over a Junior Mortgage as the First Mortgage being refinanced, provided that:

(1) the principal amount secured by the Junior Mortgage does not exceed $150,000;

(2) the principal amount secured by the Refinance Mortgage does not exceed the unpaid, outstanding principal balance secured by the First Mortgage plus an amount to pay closing costs not exceeding $5,000; and

(3) the Refinance Mortgage contains the following statement in bold or CAPITALIZED letters: "This is a refinance of a deed of trust/mortgage/other security instrument recorded among the Land Records of ____ County/City, Maryland in liber no. __ folio __, in the original principal amount of ___, and with the unpaid outstanding principal balance of _____. The interest rate provided for in the evidence of indebtedness secured by this refinance mortgage is lower than the applicable interest rate provided for in the evidence of indebtedness secured by the deed of trust/mortgage/other security instrument being refinanced."

Under current law, a valid mortgage that is properly recorded ordinarily takes priority over subsequently recorded mortgages. Once priority is established, a subordination agreement is generally required in order to reestablish priorities between lenders.

Refinancing can, of course, help a homeowner achieve better loan terms, such as lower interest rates. But under current law, when a First Mortgage is refinanced, the holder of an existing Junior Mortgage must agree to subordinate so that the Refinance Mortgage can have first lien priority. The holder of an existing Junior Mortgage can refuse to sign the subordination agreement and, thus, block the homeowner's ability to refinance the First Mortgage. Even if a Junior lender agrees to a subordination agreement, it can take time to approve the request and refinancing homeowners may be required to pay processing fees.

The new statute will solve some of these problems with respect to Junior Mortgages securing principal amounts of $150,000.00 or less, provided the statutory requirements are met. To determine whether a borrower or new lender can take advantage of the new statute, you must be able to answer "yes" to each of the 8 questions below.

QUESTIONS:

1. Is the mortgage being refinanced a First Mortgage? If not, automatic subordination is not possible. Refinances of second mortgages and refinances of both a first and second would not qualify under the statute. Please note that the statute does not have any effect on subordinate junior judgments or similar liens - just Junior Mortgages.

2. Is the property "residential?" Residential property is defined as "real property improved by four or fewer single family dwelling units that are designed principally and are intended for human habitation." Thus, First Mortgages on commercial property do not qualify. The appraisal or tax assessment records may assist in confirming residential status.

3. Does the Junior Mortgage secure a stated principal of $150,000 or less? If not, subordination by statute is not possible.

4. Is the principal amount secured by the Refinance Mortgage less than, or equal to, the unpaid principal balance on the obligation secured by the First Mortgage, plus up to $5,000 in documented closing costs (line 1400 of the HUD-1 and HUD-1A)? If the answer is no, automatic subordination is not possible. Although the phrase "closing costs" is not defined in the statute, it is believed that the term was meant to embrace "settlement charges" found on lines 1400 and 103 of the HUD-1 and lines 1400 and 1602 on the HUD-1A. Essentially, the statute will not apply to "cash-out" refinances because any difference between the existing unpaid principal under the First Mortgage and principal debt secured by the Refinance Mortgage must represent "closing costs" and not cash to borrower.

5. Is the interest rate of the Refinance Mortgage less than the interest rate of the First Mortgage being refinanced? If such is not clearly demonstrable, automatic subordination will not be possible. Determining the interest rate of the Refinance Mortgage will be fairly easy as the promissory note will be available prior to closing. Determining the interest rate of the First Mortgage may be more difficult (particularly if it secures a variable rate loan) and may require obtaining loan documentation on the first loan from the borrower or the loan servicer.

6. Do the Refinance lender's instructions state that secondary financing may remain in place? If not, the Refinance lender must provide such written instructions.

7. Does the Refinance Mortgage contain the statement set forth above in bold or CAPITALIZED letters? If not, such statement must be added. Failure to include the statement or to include it in bold or CAPITALIZED letters will mean that the Junior Mortgage will not be subordinated by the operation of the statute.

8. Will the First Mortgage be paid in full (and subsequently released of record)? If not, automatic subordination will not apply.

If you can answer "yes" to all 8 questions, then automatic subordination will apply and no written subordination agreement is necessary. Please don't hesitate to call The Kirsh Law Firm should you have any questions.

 

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