Based on this fundamental definition, we can now begin to apply the concept of “subordination” to mortgages. Subordination agreements are the most common in the mortgage industry. If a person borrows a second mortgage, that second mortgage has less priority than the first mortgage, but these priorities can be disrupted by refinancing the original loan. First, it may be helpful to have a basic definition of subordination itself. If you have a boss or executive you talk to in the workplace, you are a subordinate of that person. You`re doing your job, but at the end of the day, it`s the team leader who`s responsible for everyone rowing in the same direction. The Director`s decisions take precedence. Subordination is the process of classifying home loans (mortgages, HELOC or home loans) based on importance. For example, if you have a home line of credit, you actually have two credits – your mortgage and HELOC. Both are at the same time secured by the security of your home. By subordination, lenders assign these loans a “deposit position”. In general, the first deposit position is assigned to your mortgage, while your HELOC becomes the second right of pledge. Subordination agreements can be used in different circumstances, including complex corporate debt structures.
In addition, these agreements are common in other real estate practices. Three types of agreements are briefly explained below. The law surrounding subordination agreements is complex and there are many subtleties that only an experienced lawyer can analyze. If you need help preparing an agreement or need an analysis of the terms of the contract, please contact the experienced lawyers at Bremer, Whyte, Brown & O`Meara LLP for a consultation. A subordination agreement is a legal document that establishes that one debt is ranked behind another in priority for the recovery of a debtor`s repayment. Debt priority can become extremely important when a debtor is in arrears with payments or goes bankrupt. Individuals and companies turn to credit institutions when they have to borrow funds. The lender is compensated if he receives interest on the amount borrowed, unless the borrower is in arrears in his payments. The lender could require a subordination agreement to protect its interests if the borrower solicits additional pledge rights on the property, for example.B. if he took out a second mortgage. Debt subordination is not uncommon when borrowers are working on financing and entering into credit agreements.
Subordination agreements are often executed when a homeowner refinances the first mortgage. The refinancing terminates the loan and drafts a new one. These events occur at the same time. As soon as the bank terminates the primary mortgage, the second mortgage enters the senior position and, therefore, the refinanced primary loan ranks behind the second mortgage. Primary mortgage lenders wish to retain their first-position rights in a forced sale and will not allow refinancing unless the second borrower signs a subsequent agreement. . . .