Summary:

Yes, the lien holder will subordinate their interest.  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 aware of the weight of your decisions and the responsibility that comes with them.

Unless the mortgage broker verifies in writing the principal parties’ willingness to subordinate a lien, the process is a waste of time for everyone involved.

Article:

Subordinated Liens:

Certain loan documents are recorded using a sequential date and time-stamped method.  The senior lien is recorded first.  In some cases, it is desirable or necessary to retain a first lien on the property while agreeing to subordinate it to a junior position.  This is done using a subordination agreement.  The debtor, original lender, and beneficiaries approve and sign the deal.  The Trustor or Borrower will allow the lien priority to be transferred to a subordinate (lesser) or junior position.

https://www.law.cornell.edu/wex/subordination_agreement#:~:text=The%20creditor%20usually%20will%20require,not%20taking%20on%20high%20risks.

https://corporatefinanceinstitute.com/resources/commercial-lending/subordination-agreement/#:~:text=A%20new%20creditor%20may%20wish,two%20claims%20against%20specific%20collateral.

There are many reasons for the subordination of a document.

Reasons include:

• The seller carry-back lender (beneficiaries) seeks partial payoff for tax-deferral or cash-flow reasons.
• The property equity may be insufficient to refinance and pay off all underlying liens and encumbrances.  The transaction will be successful only if one or more junior lienholders (lenders) agree to subordinate all or part of their loans, potentially resulting in a partial principal paydown.
• Certain encumbrances should be recorded but are adequately protected even in a subordinate lien position.

Real estate lending involves representations from borrowers and mortgage brokers, but some of these claims are myths.  The underlying question is whether some misrepresentations are intentional or made in ignorance.  A seasoned processor or underwriter should exercise healthy skepticism.  Their role is to uncover the truth and guide the transaction accordingly, ensuring you feel informed 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, the lender records a lien to secure the interest.  A lien is a legal right, typically a security interest, in real or personal property granted to a creditor as consideration for a loan.  The creditor or lender has a charge on 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 relates to the date 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 lien hierarchy on a property, regardless of eachlien’ss dollar amount, giving you greater control over your transactions.

If you were to visit the recorder’s office, stand in line, and have the documents recorded, you could verify the recording sequence for yourself.  What makes the recording the order?  How do you know that the recorder did not make a mistake and record the documents out of order?  You may order and pay for a type of insurance policy called title insurance.  The policy guarantees your lien priority position; otherwise, you 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, retaining a lien on the property may be desirable or necessary, even if another lien is recorded after the original one.  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 significant time waste.  His potential should instill caution and attention to every transaction detail.

When the question of a lender agreeing to a subordinate loan arises, the processor or underwriter’s first responsibility is to contact the lender and obtain written confirmation that they agree to subordinate the loan under specific conditions.  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.