- October 11, 2018
- All Virginia Issuing Offices
- UNDERWRITING - Updated Procedures for Insuring Refinances With Existing Subordinate Trusts
§55-58.3 of the Code of Virginia provides for the "automatic" subordination (i.e., without the necessity of recording a deed of subordination) of existing junior liens when a prior lien is refinanced. To qualify for this treatment, the refinance of the senior lien must meet rigid guidelines specified within the statute. This Bulletin will review the requirements for compliance with the statute and outline new procedures for documenting your compliance with the statute.
The refinance mortgage must state on the first page of the deed of trust, in bold or capitalized letters: "THIS IS A REFINANCE OF A (DEED OF TRUST, MORTGAGE OR OTHER SECURITY INTEREST) RECORDED IN THE CLERK'S OFFICE, CIRCUIT COURT OF (NAME OF COUNTY OR CITY), VIRGINIA, IN DEED BOOK ____________, PAGE ____________, IN THE ORIGINAL PRINCIPAL AMOUNT OF ____________, AND WITH THE OUTSTANDING PRINCIPAL BALANCE WHICH IS ______________."
NOTE: This "automatic" subordination section does not apply if the junior deed of trust secures an original principal amount in excess of $150,000.00. The new principal amount of the refinanced mortgage cannot be more than the existing principal balance of the old mortgage plus $5,000.00.
The interest rate of the refinanced mortgage cannot exceed the interest rate of the old mortgage. The interest rate of the new mortgage must be stated in the deed of trust. If the new note contains a variable rate of interest, you must obtain and record subordinations of all junior liens, even if the initial interest rate of the new note is less than the old note.
The interest rate is generally not stated in the Deed of Trust being refinanced. If the interest rate is not specified, we, therefore, recommend adding the following in addition to the mandatory language which must appear on the face of the deed of trust: "THE INTEREST RATE OF THE NOTE SECURED BY THIS DEED OF TRUST IS EQUAL TO OR LESS THAN THE INTEREST RATE OF THE NOTE SECURED BY THE DEED OF TRUST BEING REFINANCED."
§55-58.3 excludes certain second mortgages from being subordinated under the statute:
The provisions of [this section] shall not apply to a subordinate mortgage securing a promissory note payable to any county, city or town or any agency, authority or political subdivision of the Commonwealth if such subordinate mortgage is financed pursuant to an affordable dwelling unit ordinance adopted pursuant to § 15.2-2304 or § 15.2-2305, or pursuant to any program authorized by federal or state law or local ordinance or resolution, for (i) low- and moderate-income persons or households or (ii) improvements to residential potable water supplies and sanitary sewage disposal systems made to address an existing or potential public health hazard, and which mortgage, if recorded on or after July 1, 2003, states on the first page thereof in bold or capitalized letters: "THIS (DEED OF TRUST, MORTGAGE OR OTHER SECURITY INTEREST) SHALL NOT, WITHOUT THE CONSENT OF THE SECURED PARTY HEREUNDER, BE SUBORDINATED UPON THE REFINANCING OF ANY PRIOR MORTGAGE."
Therefore, if you are asked to insure the refinance of a first mortgage on which a subordinate mortgage of the type described above exists, you must require the receipt and recordation of a written Subordination Agreement from the subordinate lien holder. This would apply, for example, to an ADU loan from the Arlington County Housing Administration.
The restriction on automatic subordinations does not apply, however, to assistance loans from private foundations, such as Habitat for Humanity. These loans may still be subordinated under the statute.
If all of the above conditions are met, any and all liens junior to the lien of the deed of trust being refinanced will remain in their subordinate relative positions without a signed and recorded Deed of Subordination.
We have attached an “Automatic Subordination Checklist”.
Effective December 1, 2018, you must complete the checklist and email it to underwriting counsel. No other documentation must be provided. Underwriting counsel will acknowledge receipt by return email to document approval for your file. You may then insure the refinanced Deed of Trust in reliance on 55-58.3. All senior deeds of trust must be excepted to in Schedule B-1, and junior deeds of trust should be listed in Schedule B-2 with the notation, "subordinate to the lien of the deed of trust insured hereunder by virtue of §55-58.3, Code of Virginia." You may also issue the ALTA Short Form Loan Policy with the appropriate recitations on an attached addendum.
If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.
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.