Mortgage Banks Holding Borrowers Hostage

Quite a few people who sought to refinance over the past month or so may have gotten some nasty surprises in regards to their second mortgages.  The second mortgage holder won’t let them refinance!  I know, you are saying WTF? 

What many people don’t know is that if you have a second mortgage or a home equity line of credit, the second mortgage lender has to approve the refinancing your first mortgage.  This is called subordination.  Basically, the second mortgage lender has to agree to take a back seat to the new first mortgage holder.  In the past, this used to be just some additional paperwork as part of a regular refinance.  You want to lower your first mortgage interest rate, but leave the second mortgage alone.  We simply fax a few things to the second mortgage lender and they approve it and everyone is happy.  Not anymore.

Second mortgage lenders have been bearing a lot of risk recently with the implosion of the mortgage market since they are subordinate to the first mortgage holder.  In other words, when a loan goes into default, it is the second mortgage lender who is going to really lose their shirt as the may get nothing back.  As a result, many second mortgage lenders have gone out of business altogether or significantly tightened their guidelines.  Because of the increased risk, they no longer want to be subordinate to new loans and in some cases (although they won’t come right out and say it) would prefer if the borrower just paid the loan off so they can get it off their books because the loan no longer carries the same value.

I recently had a client looking to refinance their first mortgage and they had a second mortgage with National City.  National City declined our request to subordinate to the new first mortgage even though we were shaving almost a full percentage point off in rate.  Fortunately, I was able to find my client’s a better second mortgage, so we just paid off National City and told them to go have a Coke and a smile.  What is retarded about this situation is that my clients are IMPROVING their situation so you would think banks would be happy.  But alas, they are not.  As I have mentioned in previous post, banks don’t make loans because they make sense. They make loans because they have a value to investors on Wall Street.  Often times, this dynamic results in situations like this where banks literally do some things that seem very illogical.

National City is basically refusing to subordinate any second mortgages at this point.  However, I would like to point out that they are being pretty shady about it given that they will offer to refinance the first mortgage with National City.  In other words, they won’t let you use the lender of your choice and using the fact that they have subordination rights on the second mortgage to force you to get a National City first mortgage.  Of course, their rates aren’t going to be the most competitive either.   Talk about predatory lending.

Quite frankly, I hope  enough people get pissed off about this to get a lawyer to file a class action lawsuit against some of the lenders pulling this kind of BS.  Remember, it is large mortgage banks who are screwing people over like this, not mortgage brokers as the media would have you believe.

Much to my surprise, the mainstream media is reporting on this very issue.  See an article in the Wall Street Journal today.