As homeowners try to refinance their mortgages at lower rates, their home equity lenders are telling them, "Not so fast."
Home equity lenders are throwing roadblocks in front of their clients who want to refinance their primary mortgages. In some cases, they delay refinances for a month or more; in other cases, they block homeowners from refinancing altogether -- all because of something called "resubordination."
"It can completely blow a refi out of the water," says Christopher Cruise, senior loan officer for GOTeHomeLoans.com in Bethesda, Md.
Resubordination comes into play when a homeowner wants to refinance a primary mortgage and keep the second mortgage in place -- either a home equity loan or a home equity line of credit. Before the refi can happen, the home equity lender has to agree to let the second mortgage remain where it is -- in second position -- instead of moving up in line and becoming the primary mortgage. That agreement is a resubordination.
Think of the situation as a restroom queue at a concert. Your name is Primary, and you're at the front of the line. Behind you is someone named Equity. Then your friend Refi runs up and needs to go -- really bad. You ask Equity if it's OK if Refi takes your place. If Equity denies permission, or takes too long to grant it, there can be messy consequences.
A bank's refusal to resubordinate can be costly to the homeowner. Caleb Shaffer has two mortgages on his duplex in Oakland, Calif. Both loans are with SunTrust. A credit union offered to refinance the primary mortgage at a lower rate, saving roughly $250 to $300 a month. Shaffer says he couldn't go through with the refinance because SunTrust refused to resubordinate the second mortgage. (SunTrust has received $5 billion in TARP funds from the federal government, or $34.13 for every working American.)
Shaffer says he was told that he could refinance with SunTrust, but not with another lender. "They're saying their policy is they don't subordinate unless it's within the family of SunTrust," he says.
SunTrust offered to combine his two mortgages and refinance them into one loan. But if the loans were combined, he would end up with a higher-rate jumbo mortgage, with much higher monthly payments. The point of getting two mortgages (of $500,000 and $100,000) was to avoid getting a jumbo loan, with its higher rate.
A SunTrust spokesman denies that there's a policy requiring borrowers to refinance with SunTrust. "While I can't comment on specific individual relationships, in general, we do consider resubordinations of second liens on a case-by-case basis taking into account numerous factors," spokesman Hugh Suhr says.