The most difficult hurdles to overcome when helping HARP loan clients are typically placed by the homeowner’s existing lenders.
Thankfully, the second mortgage companies have become much more lenient and willing to play ball. Companies are typically going to be okay with subordinating their loan if the homeowner is working on a HARP refinance on their first mortgage. I’ll explain what this means, but it hasn’t always been the case.
If a homeowner qualifies for a HARP refinance on their first mortgage and they also have a second mortgage, they need permission from the second mortgage company to refinance. This is called “subordination”. Many of the lenders who hold the second mortgages were not approving subordinations on HARP loans when the program was introduced.
I’m happy to say that almost every major bank is now approving subordination agreements if the person refinancing is seeking HARP loan. I have personally seen Bank of America, Wells Fargo, Chase, Citi, Flagstar and many other banks or lenders approve subordinations over the past 4 months. In fact, it has become so common that I expected all lenders to approve these subordination requests.
I was shocked to recently learn that Key Bank, one of the nation’s largest bank-based financial services companies, has a policy against subordinating. My understanding is that Key Bank will not subordinate a second mortgage above 100% value, or if the home value has decreased since the second mortgage was originated. This has major implications for homeowners, and it’s a slap in the face to the government officials who fought to put the HARP loan into effect. The whole purpose of HARP is to benefit homeowners who have paid their mortgage on time and who need to refinance. We are talking about responsible homeowners whose tax dollars helped pay for this program. We are talking about responsible homeowners who need a fair refinance. One of the most frustrating elements in this is that HARP refinances not only help the homeowners, but it actually IMPROVES the position of the second mortgage company. There is no good reason for Key Bank, or for any other lender to not approve a subordination request on a HARP loan.
Let me illustrate a little further with an example. Let’s suppose I have a client who has a Fannie Mae 5/1 ARM. They have a Key Bank home equity loan. The adjustable rate loan is set to adjust in a few months and the customer wants to refinance to a lower, 30 year fixed loan which they’re qualified for under HARP guidelines. They would be lowering their rate by over 1% and moving to a 30 year fixed. Given the current circumstances, the homeowners would be lowering their payment and protecting themselves from a potential payment increase. It is my understanding that Key Bank will not subordinate their second mortgage when all we’re trying to do is to fix the rate and lower the payment! The alternative is probably that after the adjustment, the homeowner is forced into higher payment that he or she probably can’t afford and may be forced to let the home go. This appears to be bad business in every way possible. They run the very real risk of damaging the borrower by limiting his or her ability to refinance. Additionally, putting the borrower in financial distress will likely place a bank’s own equity in the home at risk.
Key Bank has always been a specialty lender for home equity loans. They have historically offered homeowners some of the best second mortgages available. This tradition continues today. Their rates and fees on second mortgages have been competitive for many years running. As you can imagine, many homeowners have second mortgages with Key Bank.
Seeing that there is minimal upside for Key Bank to have this position on subordinating for HARP refinances, I don’t think Key Bank intends to maintain this position for the long term, but there’s only so much time left for them to correct their position. Considering that HARP loans have been extended until May of 2011, Key Bank and other lenders with similar positions have a short window of time to do the right thing and help protect their clients, as well as themselves, before the new deadline passes.
Great news! I’ve learned that Key Bank WILL approve subordinations on higher loan-to-value but they may not do it as easily as other banks. They will review all requests on a case-by-case scenario. If the subordination benefits the borrower and does not increase the risk of Key Bank’s position, they will approve it. I’ve received confirmation they’ve subordinated a 2nd mortgage as high as 190% of the home’s value!!
If you call Key Bank and ask their customer service rep, you likely won’t get the answer you’re looking for. They’ll tell you the loan-to-value must be the same as the original loan which we all know is not possible if we’re trying to apply for a HARP loan. However, this is to protect Key Bank’s position and not over promise what they can do for clients.
When I spoke to Key Bank, they told me anything and everything you can do to support your request that it’s beneficial for both Key Bank and the client will be useful. Here are some examples:
- If your first mortgage is adjustable and it’s set to adjust soon, they will take your higher consideration on your request. Include the terms of your old AND new loan on your subordination request so they can see the benefit
- If lowering your payment is needed to prevent hardship, explain so. Explain how your current payments are difficult to cover, give reasons and examples why and how the lower 1st mortgage payment will fix this problem. Have the loan officer refinancing your first mortgage show a summary of your debt ratio so Key Bank knows you can’t afford the payments unless they do go down.
- If you don’t have an adjustable rate mortgage that’s about to adjust or some other type of hardship such as a high debt-to-income ratio, then there’s a better chance you won’t get the subordination approved. Remember that Key Bank wants to agree to subordination agreements that make sense for everybody. Allowing you to refinance and increase your existing loan amount to cover closing costs does not benefit Key Bank. I have not tried it, but it sounds like you’ll have a better chance of getting a subordination through if the new loan amount is the same or less than the old one since it doesn’t not affect the position of Key Bank’s loan in any way.
- Key Bank loves new banking relationships, so if you haven’t moved all of your banking to them, offering this on your request may help in getting it approved
We’ll see how this plays out. That said, it sounds like Key Bank is willing to approve subordination requests to the clients who really need it, which is fantastic. I cannot commend Key Bank enough for taking this “Make Sense” attitude and helping homeowners in a market where homeowners need all the help they can get.
The deadline for HARP loans has been extended until June 30th, 2012 (1-year).
Disclaimer: The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of Cobalt Mortgage.