- December 02, 2014
- All Maryland Issuing Offices
- LEGISLATIVE UPDATE - Maryland’s “Automatic Subordination” Law for Residential Refinances
Effective October 1, 2013, amendments were made to Maryland Real Property §7-112 to allow for the automatic subordination of junior liens. If the terms of this statute are adhered to, a written subordination agreement will not be required from the existing junior lien holder. This new law is very similar to Virginia’s automatic subordination law, as codified in §55-58.3, Code of Virginia.
Maryland Real Property §7-112 applies only to mortgages, deeds of trust, or other security instruments that are subordinate in priority to an existing first mortgage or deed of trust. Note: judgment liens or liens filed under the Maryland Contract Lien Act (Maryland Real Property §§ 14-201 through 14-206) may not be subordinated under Maryland Real Property §7-112.
Junior liens may be subordinated automatically under the following circumstances:
1. The property secured by the new loan must be residential property improved by four or fewer single family dwelling units that are designed principally and are intended for human habitation;
2. The borrower must refinance the full amount of the debt secured by the existing first lien;
3. The interest rate on the new loan must be lower than the interest rate secured by the refinanced loan;
4. The principal amount secured by the junior lien does not exceed $150,000;
5. The principal amount secured by the refinance mortgage does not exceed the unpaid outstanding principal balance secured by the first mortgage or deed of trust plus an amount not exceeding $5,000 to pay closing costs and escrow costs; and
6. A refinance mortgage or deed of trust shall have, at the time of recordation, the same lien priority as the first mortgage or deed of trust that the refinance mortgage or deed of trust replaces.
Last but not least, the new mortgage or deed of trust must include the following printed language in bold or capitalized letters:
"This is a refinance of a deed of trust/mortgage/other security instrument recorded among the land records of _______ county/city, Maryland in liber no. ____, folio ____, in the original principal amount of ________, and with the unpaid outstanding principal balance of _______. The interest rate provided for in the evidence of indebtedness secured by this refinance mortgage is lower than the applicable interest rate provided for in the evidence of indebtedness secured by the deed of trust/mortgage/other security instrument being refinanced."
All 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 Maryland Real Property §7-112."
Although Maryland Real Property §7-112 goes a long way towards saving time on the part of settlement agents, and potentially hundreds of dollars per file for clients, it is not a complete solution for all refinances involving junior liens. In particular, it should not be used where either the new mortgage or the subordinated mortgage secure adjustable rate loans without underwriting approval.
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 http://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.