query: what happens if mortgage is not subordinated

Let's talk about mortgage lien priority. Mortgages tend to fall into two categories - primary and subordinate. The most common form of subordinate mortgage is the home equity loan. Most consumers have the home equity loan or HELOC as a second mortgage recorded after their main mortgage. The main mortgage is in first position. First position gives the main mortgage lender lien priority in the event of a foreclosure. First position gets paid first.

So, let's say you have two mortgages, your main mortgage and a HELOC. You decide to refinance your main mortgage but you like your HELOC and don't want to pay it off and satisfy it. The problem is that your HELOC will move up to first position when you payoff your main mortgage and that would put your NEW main mortgage in second position. THAT won't make your main mortgage lender very happy at all, so they will require that your HELOC lender agree to subordinate their position, allowing your new main mortgage lender to basically skip in front of them in line.

This subordination is done with a legal document signed by the HELOC lender. The subordination document is usually recorded when you record the new main - first - mortgage.

As a consumer, you sort of have to keep an eye on the refinance process if you intend to leave a HELOC or any subordinate mortgage in place. It might take time to get the subordination approved and so you should contact your HELOC lender and get the process started. Don't rely on the title agent to do this because they might not know you intend to keep the loan until late in the transaction. That's the other thing - make sure YOU tell the title agent that you intend to have a subordination and also make sure you have told your new main mortgage lender.

What happens if the transaction closes and no one did a subordination? The title agent - who likely insured first position for your new main lender - will have to fix it. They'll have to go to the other lender and ask for the subordination. This can still be done post closing but it's risky because the lender might not agree. If the lender doesn't agree, then the new main lender who wants first position may have a claim against the loan title insurance policy.

Claims are based on losses but the lack of lien priority may impact the saleability of the mortgage paper and though the lender hasn't suffered a loss in a foreclosure, you still have the question of whether or not the title agent followed the lender's written instructions. The title insurer will work all of this out with the mortgage lender.

As the consumer, your obligation is to cooperate, as needed, to assist in the resolution of getting the subordination. Why? Well, your new main mortgage was likely subject to the subordination and you have to satisfy that condition even if it is post closing.

query: how does a lender get priority

The mortgage lender first has the title searched and confirms prior to recordation of their instrument that they will have the lien priority they desire. A smart first lien lender will insist upon a title insurance loan policy to guarantee that position.

If the search reveals a lien in a superior position and the parties do not intend to satisfy that lien, they can negotiate for a postponement or subordination agreement. This agreement may or may not require a payment from the borrower for the privilege of moving the lien priority. The borrower should start negotiations for a postponement as soon as they are aware of the issue. Some lenders require an appraisal and the process might take time. Once approved, the postponement is recorded prior to the recordation of the new mortgage instrument and it effectively gives public notice that the new mortgage instrument has priority over the other lien even though the original recording date of the older lien is earlier.