Dear Associates:
§55-58.3 of the Code of Virginia was enacted effective July 1, 2000 to
provide 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:
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 ______________."
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 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. You may then
insure the lien of the refinanced deed of trust in its proper position as though
there were such a signed and recorded Deed of Subordination.
NOTE: This "automatic" subordination section does not apply if
the junior deed of trust secures an original principal amount in excess of
$50,000.00.
The statute applies to all subordinate liens, however many there may be. Thus,
if for instance there is a second and a third trust, neither of which is in
excess of $50,000.00, both will remain in second and third position when the
first trust is refinanced in accordance with the guidelines above. Similarly,
if the second trust is refinanced in accordance with the above guidelines,
the first and third trusts would retain their relative positions as well.
Rarely will the interest rate be stated in the Deed of Trust being refinanced.
If it does not, 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 OF THE NOTE SECURED BY THE DEED OF TRUST BEING REFINANCED."
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.
Provided all of the above conditions are met, you may insure the refinanced
Deed of Trust in its proper position. 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.