Subordinate Deed of Trust

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A subordinate deed of trust occurs in a situation where a person has two deeds on a single property. While a deed of trust is, in fact, different from a mortgage, similar laws affect both deeds of trust and mortgages. A deed of trust transfers legal title of a property to a trustee. This trustee holds the legal title to the property as security for a loan between a lender and a borrower. A mortgage, on the other hand, is a recorded note for a loan between the homeowner and the lender. Mortgages do not involve trustees

Hierarchy of Deeds

  • Deeds of trust have a hierarchy based on the filing date of the deed. For example, the filing date of the second deed of trust on a property is more recent than the property's first deed of trust. Properties can theoretically have an infinite number of deeds of trust ordered by filing date. The filing date primarily affects the order a deed will receive repayment in the event of a default or foreclosure. In most cases, the deed with the earliest filing date will receive full repayment after default or foreclosure before any of the other subordinate deeds of trust receive repayment. After the first deed, the second deed will hold a secondary repayment position after a default or foreclosure. The only exception to the filing date rule is if one of the subordinate deeds of trust has signed a subordination agreement changing the order of the lien's priority.

Selling a Property With Several Deeds

  • If a property has more than one deed and the owner wishes to sell the property, the order of the deeds may come into play. For example, in a short sale the sale price of the property does not cover the obligations to pay off all of the deeds, the shortfall amount will not spread evenly over each deed. Instead, the transaction covers the first deed in full. Then any proceeds left will go to the second deed, and then third deed and so on. All subordinate lienholders will have to agree to the short sale transaction.

Other Implications

  • After the owner of the property pays the primary deed of trust, the secondary deed of trust will always assume the first position. This becomes especially important when refinancing a deed of trust. Typically, if the refinance only repays the first trust deed, the new refinanced loan will hold a secondary lien position. Since secondary lien positions generally hold higher interest rates, you will typically want to secure a subordination agreement from the current secondary lienholder.

Subordinating As an Alternative

  • The subordination agreement will allow the new refinanced loan to hold the primary lien position. With a subordination agreement, the current holder of the second deed has to agree to subordinate the deed so that you can refinance your loan. Generally, holders of subordinate liens will not agree to subordinate deeds of trust. However, if you have multiple deeds of trust on your property and want to refinance, the subordination agreement is a legal alternative that you may wish to pursue.

References

  • "Real Estate Principles"; Charles Floyd and Marcus Allen; 2002
  • "Principles of Real Estate Finance"; Charles Long; 2010
  • "Real Estate Law"; Marianne M. Jennings; 2010
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