During the 2002 General Assembly, Senate Bill 549 (S549) amended the Virginia State Code Section 55-58.3 that covers the priority of refinance mortgage over subordinate mortgages. The text change permits that the “subordinate mortgage shall retain the same subordinate position with respect to a refinance mortgage” provided that three limitations are met. The three limitations of: 1) inclusion of specific bold or capitalized text; 2) limited first principal increase of $5,000; and 3) an interest rate that does not exceed the prior mortgage does help to reduce, but does not mitigate, the liability to the County’s promissory notes/deeds of trust that are in second lien position.Housing Services does not recommend that subordinate liens that are payable to a public body of the Commonwealth be automatically re-subordinated. The primary reasons for this recommendation are twofold. The first is that County’s Down Payment/Closing Cost Program (proffer funding) specifically does not permit re-subordination. If a refinance is to occur the lien must be paid in full and this protects the County, the Affordable Dwelling Units (ADU) and the program participants from any predatory lending terms that could place the purchaser at risk of foreclosure (if a foreclosure occurs the ADU covenants are automatically released, the 15 year price restriction is terminated and the affordable physical unit is lost). This also permits additional citizens to be served as the funding re-enters the revolving fund sooner.
The second concern is to ensure housing/financial counseling prior to a refinance especially as it relates to such programs as the Homeless Intervention Program (state and local tax funding). These program participants are already are at high risk with marginal credit when they receive services as the program prevents mortgage foreclosures. There is a strong need for counseling prior to refinancing. In a recent case, the County declined to re-subordinate our lien position as the participant refused to seek financial counseling, was pursing a marginal mortgage product with risky terms due to poor credit, was not obtaining a significantly reduced interest rate (especially given the market comparisons), and, due to inaccurate appraisal data, was refinancing with $66,000 in negative equity. If the County had stayed in the subordinate position the HIP principal would have been permanently lost when this property went into foreclosure. In this case, the monies were repaid to the County and, since this is also a revolving loan program, additional citizens were served.
The second concern is to ensure housing/financial counseling prior to a refinance especially as it relates to such programs as the Homeless Intervention Program (state and local tax funding). These program participants are already are at high risk with marginal credit when they receive services as the program prevents mortgage foreclosures. There is a strong need for counseling prior to refinancing. In a recent case, the County declined to re-subordinate our lien position as the participant refused to seek financial counseling, was pursing a marginal mortgage product with risky terms due to poor credit, was not obtaining a significantly reduced interest rate (especially given the market comparisons), and, due to inaccurate appraisal data, was refinancing with $66,000 in negative equity. If the County had stayed in the subordinate position the HIP principal would have been permanently lost when this property went into foreclosure. In this case, the monies were repaid to the County and, since this is also a revolving loan program, additional citizens were served.
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