Bulletin: CA2009002

Date:
June 04, 2009
To:
All California Issuing Offices
RE:
Subordination Agreements

Dear Associates:

The general improvement of the economy together with loan programs like those under the new federal Homeowner Affordability and Stability Plan (HASP) are expected to spur renewed refinance activity. Since many homeowners have second mortgages, this activity will bring with it the need for subordination agreements. This memo will set out guidelines for acceptable subordination forms, and discuss related topics.

Approved Forms

The best and easiest way to know that you can rely on a subordination is to use a properly executed unmodified CLTA approved form. These forms are available on AFW and may also be found on Virtual Underwriter (www.vuwriter.com) in the California forms section as well as at Stewart Title of California's Docs Online site (http://www.stewartca.com/docs-online).

There are four such forms. Form A is for use when subordinating a new deed of trust to an existing one. When two new deeds are at hand, Form B is used. Form C subordinates an existing junior loan to an additional advance on a superior loan. An existing lease subordinates to a new deed of trust in Form D.

These forms incorporate language effective to make several key points clear and enforceable:

1) The maker of the subject loan is depending on the agreement to make its loan.

2) The agreement supersedes any prior agreements relating to subordination including terms incorporated in the subordinating document.

3) The subordination is not conditioned on appropriate application of the funds.

4) The subordination is unconditional.

5) The note has been properly endorsed.

6) The signer is the current holder of the interest being subordinated.

7) Both equitable and legal interests are subordinated.

8) Statutory requirements are met.

Generally, a subordination agreement should be signed by the present holder of the subordinating interest and the current owner of the land.

You may insure the superiority of a subject loan without further review or approval when one of these forms is used, provided the transaction does not exceed your limit. Subject to cautions discussed in special cases below, these forms may be relied upon to effectively and insurably subordinate all loans including construction and purchase money loans. Due to possible confusion of the interests involved in the subordination, special care should be taken to assure that the forms have been completed properly.

If you are asked to rely on a modified or different form by a well-known, reputable bank, you should refer the form to advisory staff to make sure the above points are adequately addressed, or make an independent determination of the point omitted. The language of the approved form is a suitable model.

If you are asked to accept a modification or different form by an unfamiliar lender, credit union, broker, or private lender you should obtain underwriting approval.

The usual case arises in connection with a subordination agreement submitted for recording in connection with a loan transaction, but you should be mindful of situations in which an agreement already of record may affect your contemplated coverage, in the REO context for example.

Special Cases

The following situations present special problems in regard to lien priority. Obtain underwriting approval before insuring the effect of a subordination agreement in the context of any of the following.

  • Automatic Future Subordination

Provisions in documents for automatic future subordination are not to be relied on for insurance, but should be considered as they may complicate the priority of other matters.

  • Construction Loans

Because of the unique relationship between construction loans and mechanic's liens, special caution should be taken when subordinating an interest to a construction loan. In particular, be aware of the problem of circuity of lien priority discussed below.

  • Purchase Money

The statutory provision awarding lien priority to purchase money mortgages is another possible source of the circuity of lien priority problem.

  • Federal Tax Liens

The IRS has its own form for subordinating its interest under federal tax liens called a Certificate of Subordination. Do not rely on other forms to subordinate federal tax liens. Because federal tax liens are automatically subordinate to certain other interests, subordination of these liens is another potential source of a circuity problem.

  • Circuity of Liens

This problem occurs when a lien having superiority over another interest becomes subordinate to a third matter which is itself subordinate to the intermediate interest. Here's an illustration. Suppose mortgage A records in 1993, and mortgage B records in 1996. A is superior to B because it recorded first. Now suppose mortgage C records in 2001, and as a condition requires that mortgage A subordinate. A will be junior to C, because of the subordination, and B will be senior to C, because it recorded first, but what becomes of A's relationship to B? Can A be superior to B, while being junior to C? Does the subordination of A to C constitute A's subordination to B as well by virtue of B's superiority to C? This example is confined to lien priority established by record matters only. The effect of off-record matters, such as commencement of work, or statutory provisions, such as that giving purchase money mortgages priority over existing judgment liens on the buyer, can further complicate lien priority analysis and should not be neglected. Caution should be exercised so that we don't insure lien priority subject to these questions.

If you have questions relating to this bulletin, please contact your local underwriting personnel or Stewart Legal Services.

For on-line viewing of this and other bulletins, please log onto www.vuwriter.com.

THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER  AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.