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Subordination of Second Mortgages
Many people confuse the concept of a Warranty Deed with the concept of a sellers guarantee of the physical condition of the house. When we discuss Warranty Deeds, Warranty refers only to the condition of the Title. Warranty Deeds are not related to the physical condition of the house. There is no language in a deed that covers the physical condition of the house. In Maryland, there are three types of Warranty Deeds.
Why is subordination of second mortgages necessary?
Traditionally, borrowers with both a first and second mortgage who wanted to refinance their existing first mortgages, were required to obtain a subordination agreement from their second mortgage holders in order to refinance their first mortgage. Usually, a substantial fee would be required from the second mortgage lender as well as a lengthy time period required to process the subordination application. Beginning October 1, 2013, for transactions that qualify, obtaining second mortgage subordination agreements is no longer necessary. Real Property 7-112 amends the Annotated Code of Maryland to provide for a new automatic subordination law. Beginning October 1, 2014, the law was expanded to permit Escrow Costs in addition to Closing Costs to be included in the first mortgage financed costs.
There are some conditions that must be met in order for the automatic subordination to apply:
1) The property must be a 1 - 4 family residential real property.
2) The law is not retroactive. It only applies to new mortgages after the effective date of the law.
3) The new first mortgage loan must comply with all of the following:
a) The new loan must be a full refinance of the prior mortgage.
b) The new loan must have a lower interest rate than the mortgage it is replacing.
c) The new loan must be a refinance of a first mortgage.
d) The new loan must have specific subordination language written in the Deed of Trust
e) The new loan must not exceed the old first mortgage loan current principal balance plus up to $5,000 towards combined Closing Costs and Escrow Costs.
The subordinated junior lien must meet the following condions:
1) The subordination will only work on junior Mortgages or Deeds of Trust. The automatic subordination does not work on junior Judgments, Homeowner Association Liens or Condominium Liens or if the junior mortgage is a 0% interest rate loan to a State of MD or local government issued loan.
2) The secured principal loan amount of the junior lien must not exceed $150,000.00.
