In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Monday, March 03, 2008

NCC Refuses to Subordinate

by Tanta on 3/03/2008 08:34:00 AM

More credit tightening:

Take Robert Whittaker, a Sykesville, Md., homeowner who sought to refinance a $260,000 first mortgage when 30-year rates fell below 6 percent. Whittaker's interest-only adjustable rate loan was scheduled for a hefty payment reset.

Whittaker, who bought his house four years ago, contacted a mortgage broker who was able to arrange a new $260,000 loan at a fixed rate of 5.5 percent for 30 years. All that was needed was for the lender holding a $70,000 second mortgage on Whittaker's house to agree to a routine request that to keep its second lien "subordinated" to the new first mortgage. That would leave the lender in the second payoff position in a foreclosure.

Whittaker expected no problems: He wasn't seeking to increase his overall debt, his credit scores were solid, Fannie Mae approved the refinance transaction and his appraisal came in at $384,500 -- nearly $55,000 more than his combined mortgage balances.

His broker submitted the request to the second lender, Cleveland-based National City Corp., Feb. 1, expecting quick approval. On Feb. 18, the bank told employees in an internal memo that it was no longer approving requests nationwide for subordinations from second-mortgage customers, such as Whittaker, whose first mortgage was with another firm.

A spokesman for National City, William Eiler, declined to provide the number of loan customers affected and said the bank's reasons were "proprietary." Asked whether blocking customers' ability to refinance could push some of them into foreclosure after payment resets, Eiler said: "We cannot predict that this might occur." The memo, a copy of which was provided to me, acknowledged that the new policy "may not be widely accepted by our customers."

Whittaker's broker, Joseph Liberto, co-owner of Immediate Mortgage Inc. of Ijamsville, Md., called National City's action "outrageous. Here our [federal and state] governments are trying to help people facing big payment increases, and we've got lenders refusing to cooperate -- even when it makes sense for everyone involved."

Nancy Gusman, a real estate lawyer in Prince George's County, Md., outside Washington, D.C., says she is seeing lender roadblocks like Whittaker's every day. "And it's so counterproductive. All the articles you read quote the bank executives saying, 'Contact us. We want to work with you.' Then they turn around and pull stuff like this."

The change at National City illustrates how declining market conditions are affecting borrowers with second liens. Not only are equity credit lines being frozen or reduced, but issues such as subordination stymie borrowers' attempts to refinance.

When property values were soaring during the boom years, requests for subordination were rarely denied if homeowners had decent payment histories. But with prices depreciating in many markets, banks are worried that, even if customers have sterling credit, the bank's security interest in a property may be whittled away.
I'd like to know whether the point of this, for NCC, is to hold out for a pay-down (not necessarily payoff) of that second. (That, frankly, is what I'd be doing if I were National City.) If you assume that the current appraisal is not fantasy, a prime borrower with good credit should be able to get a Fannie Mae cash-out refi at 80% LTV. That would mean the borrower gets a new first lien for $307,600, which pays off the existing $260,000 first lien and leaves $47,600 to pay down the balance of that Nat City second, reducing NCC's exposure from $70,000 to $22,400. In exchange for that, they might be willing to subordinate. Even if this guy could get only a 75% cash-out, that would produce $28,375 to reduce the second lien balance.

Of course the appraisal might be fruitcake on a 1004*, but that's not what this borrower is saying or why all these people are outraged. It would not force this borrower to increase his total indebtedness any, although it would increase the interest rate somewhat on that new first lien, since it's a cash-out instead of a rate/term refi.

If Nat City is really refusing to subordinate in any circumstance, then I would say that's a pretty strange policy. But I really couldn't fault them for trying to negotiate a compromise with this particular borrower, as the details are presented. It means the guy doesn't get his 5.50% rate, but these things happen.


*That's insider for "standard appraisal form."