Saving Thousands with Robert Palmer.

Good morning, Central Florida. And welcome to today's edition of Saving Thousands.

Interest rates are at an all-time low. And with a new government mortgage program, upside down homeowners may finally have a chance to refinance their mortgage. But there's one giant barrier many homeowners still have to deal with, a second mortgage.

Second mortgages have many names, home equity lines of credit or HELOCs, piggyback loans, equity lines. All these names refer to the same thing. And these loans can stand between you and being able to refinance your loan. Today, we're going to explore just how these loans work, why they can prevent you from refinancing, and the steps you can take to refinance even when you have one.

So first, let's look at the history of these loans. During the housing boom, many lenders wanted to provide more flexible guidelines and avoid the costs and restrictions set forth by the mortgage insurance agencies. What exactly is a mortgage insurance agency? Well, whenever a conventional loan exceeds 80% of the value of the home, usually because the down payment is less than 20%, the loan requires mortgage insurance, also called private mortgage insurance or PMI.

When a loan requires mortgage insurance, lenders have to purchase this separate insurance from a private mortgage insurance company and comply with their rules. They also charge an insurance premium to the homeowner as an upfront fee or as part of the monthly payment.

During the housing boom, many lenders offered these second mortgages in order to bypass the mortgage insurance. By offering a first mortgage that was limited to 80% of the value of the home and then offering a second mortgage to make up any shortfall in the 20% down payment, lenders were able to bypass the costs and the qualifications and restrictions of the private mortgage insurance agencies. This, as we all know, led to much riskier loans.

Another primary type of second mortgage are Home Equity Lines of Credit, often called HELOCs, H-E-L-O-C. These loans allow borrowers to cash out the equity in their property without refinancing the first mortgage. These loans allow homeowners to access this equity and require a small monthly payment, often interest only, and allow them to use this cash.

Banks offered these HELOC loans in droves because they can sell adjustable rate mortgages, usually based on prime rate, and due to the banking regulators' treatment of these loans they can make a lot of them without eating up very much bank capital. This allowed banks to overextend themselves, and in return they gave borrowers to millions and millions of dollars in cash that was previously tied up in the equity of their homes.

These loans are being looked at as very low risk because at the time home prices were increasing so quickly there was always plenty of equity to cover these loans. But then everything changed when the housing market crashed. These home equity lines actually came with credit cards or checkbooks that allowed homeowners to access the equity in their home like an ATM machine, pulling out cash anytime they wanted. As the economy collapsed, many began relying on this cash to cover basic living expenses. At the same time, home prices began to drop, erasing the equity being used to back these lines of credit.

In the last four or five years, consumers started receiving notices in the mail that said their credit lines were frozen, reduced, suspended, or that further use of the account was restricted in some way. Lenders saw that the home values had fallen off a cliff, and they moved quickly to try to prevent further losses and defaults.

Now, these types of loans require borrowers to maintain a certain level of equity in their home and have much higher credit standards in order to qualify. Homebuyers with second mortgages are also much more likely to be underwater. And even though there's a new government loan program being released to help underwater homeowners refinance, all of these second mortgages could stand in the way. We'll take a look at why when we get back.

Welcome back. We've looked at where all these second mortgages came from. Now let's take a look at why they cause problems for borrowers trying to refinance to today's low rates. First, we have to understand a little bit about what's called mortgage lien law and the way funds are distributed in a foreclosure.

You see, these loans are called second mortgages because they're in second lien position. When a homeowner defaults and the property is sold in foreclosure, the proceeds from the foreclosure sale are given to the mortgage holders. And this distribution is based on what's called lien position. Let's take a look at an example of just how lien position works.

Let's say a borrowers owes $100,000 on a home and goes into foreclosure and the home is sold for the $100,000. Well, the bank gets their money back, making it a low-risk loan.

Now, what is the same home only sold for $80,000? Well, the bank would get the $80,000-- and remember, the loan was for $100,000-- so the bank would lose the $20,000 difference. Well, banks don't like to lose money on loans. But at least in this example, they get most of their money back.

But what happens if there are two mortgages? Say you have two mortgages, Mortgage A for $80,000 and Mortgage B for $20,000. If the home sold for $100,000 in foreclosure, both lenders would receive their money back. But again, what happens if the home only sells for $80,000? You have two mortgages totaling $100,000, and the home is sold in foreclosure for only $80,000. So how does the money gets split up?

Some people may believe that each lender gets their portion of the proceeds. But this just is not the case. And this is where lien position comes into play. The mortgages are organized based on the date they are recorded in public records. All mortgages are recorded in public records in the county where the property is located. And this recording gives public knowledge that this particular lender has a claim on the property in the event of default. That is when the borrower fails to make their agreed payments. Well, this recording date-- that is the date the mortgage document is actually placed into the local county public records-- determines the lien position.

So if the $80,000 Mortgage A was the first mortgage to be made, and the $20,000 Mortgage B was the second mortgage to be made, the first mortgage holder would get back their entire $80,000 and the second mortgage holder would get 0, a complete loss, because there's only $80,000 to distribute. So you can see the second mortgage holder is in a much, much worse position.

Let's look at the same scenario if the $20,000 Mortgage B had been made first and the $80,000 Mortgage A made second. Now the $20,000 mortgage would get all of their proceeds from the $80,000 sales price, and the other $80,000 mortgage would get the remaining $60,000. What a difference this makes for a Lender B. They go from a total loss to not losing a dime. At the same time, Lender A goes from not losing a dime to losing a percentage of the amount they loaned. This is what makes lien position very, very important. And again, it's based on the dates the loans are recorded with the county public records.

Now in today's market, the loans with the lowest interest rates and the best terms will require that they are in first lien position. This way, the lender has the best chance of getting their money back if something goes wrong. In fact, second mortgages are very hard to obtain in today's mortgage market. So the majority of loans are going to require that first lien position and the new HARP, or Home Affordable Refinance Program, is no exception. This is the program designed to help underwater homeowners, and they will require first lien position.

So let's go back to our example. Mortgage A is $80,000. Let's say it was made in 2006. Mortgage B is $20,000 and is made in 2007. So now the homeowner wants to refinance Mortgage A by taking out a new mortgage, Mortgage C. So you see, when you refinance you're actually taking out a new mortgage to pay off your old mortgage. The new mortgage is at today's lower rates and it pays off the older mortgage at the higher rates.

So once Mortgage A is paid off by our new Mortgage C, this moves Mortgage B into first lien position. And Mortgage C would then be in second lien position based on the dates of the loans. So in the event of a default, Mortgage C would lose out on the first $20,000 of proceeds. Like we said, today's mortgage guidelines don't allow this. Today's low rate mortgages require first lien position.

So what do we do? The lender who holds Mortgage B can sign a document saying they agree to return to a subordinate or second position. That is, they agree to let Mortgage C take lien priority and be the first mortgage, which is required to refinance at today's low rates. So in order for this borrower to refinance with Mortgage C, they have to get a subordination agreement from Lender B or pay Lender B off completely.

So what does it take to get a lender to subordinate to a new loan, allowing you to refinance? I'll fill you on the details after the break.

Welcome back. We've identified how lien position makes a huge difference in the money a lender will lose in the event of a default. So why would any lender be willing to give up a chance to be in first lien position and agree to subordinate to your new first mortgage when you refinance?

First, they realize that if they do not agree you won't be able to refinance. So they will never actually have the chance to be in first lien position. If they refuse to subordinate, you can't refinance Mortgage A, and it would therefore stay in first lien position, leaving Mortgage B in second lien position. Lenders understand this and are usually willing to subordinate to the new loan. But it's important that you remember they do you have to agree, and they may make you jump through some hoops.

The second lienholders know that they're the only thing standing between you and refinancing to today's lower interest rates and a lower monthly payment. So some lenders may ask for something in return. I've seen lenders ask for an increase in your rate. They may reduce the available line of credit. They may increase the monthly payment, so the loan is paid off quicker. Or they may even require you to pay down the balance with some of your own cash in return for approving the subordination agreement. The subordination agreement is a legal document signed by the homeowner and the lender and can thereby renegotiate the terms of the mortgage.

If you're thinking about refinancing and you have a second mortgage, it's important to begin talking to your second mortgage holder as soon as possible to begin working out the details. If you wait until the last minute to begin the subordination process, you may run into problems with your new refinance loan. Your rate lock may expire or your qualification documents may even expire. Because sometimes, it can take months to get the subordination agreement.

Homeowners also need to be prepared in the event the second lienholder does not approve the request to subordinate. There are circumstances where these requests are denied and prevent you from refinancing.

So like we talked about, there could be situations where the second lienholder wants you to give them something in return for the subordination agreement. I've seen this happen with interest rates. A lot of times right now, second mortgages are tied to prime rate, which is very low in today's market. Some people are paying as little as 3.5% on these home equity lines of credit.

Well, the banks don't like that because they're not making very much money. So they may say to you, we'll sign your subordination agreement, but only if you agree to increase the interest rate on the second mortgage to a higher level, so they can begin making some profit.

Like we said, other situations may require you to pay down some of the second mortgage. They've got a new appraisal on the property, they'll see how far upside down you are, and the second lienholder may require you to put some cash into the transaction to improve their situation.

Again, this is like a negotiation. You want something from them, which is the subordination agreement, so you can refinance to today's lower rates. And they're going to want something from you in return. In a lot cases, this may be a simple fee. Some lenders will charge $250 to $300 in return for the subordination documents.

Keep in mind they do have some work to do. They have to prepare the legal document, but all of this is up for negotiation. And the sooner you start the process, and the more you look at it as a negotiation, the better off you'll be.

So when we get back, we'll look at the actual steps required to start the subordination process and the documentation your second mortgage holder will probably require you to submit.

Welcome back. Let's look at the actual steps required to start the subordination process and the documentation your second mortgage holder could require.

Most second mortgage holders will require a conditional approval from the new lender or bank you've chosen to refinance with. As always, make sure you're getting several quotes to determine who has the best terms for your particular situation. So in order to get a conditional approval, I'm going to go over just a few items that you'll need to get the process started.

Let's start with the appraisal. This is an inspection on your home done by a local licensed appraiser that will determine your home's value. The data is gathered on sales in your home's immediate area, usually within the most recent six months of time. And the appraisers compare these home to your home to determine a value. While appraisers are trained to detect basic problems that are visible to the eye, they are not experts in all areas such as plumbing and electrical, but they will spot the things that require further inspection from a licensed professional.

Their findings will be compiled in the appraisal report, which you should always receive a copy of from your lender. And this report will contain a lot of great information about your home, and your lender should be able to walk you through how to read it and fully understand it. This report will be one of the main factors in determining your loan-to-value and what your maximum new mortgage amount will be. The second lienholder will also want to review this appraisal as they determine if your subordination request will be approved.

Next, you'll be required to provide income documentation to make sure you still qualify for the payments on the new loans. This includes pay stubs, W-2 forms, copies of your personal or business tax returns, or if you're retired you'll need your most recent social security awards letters or pension letters.

Lenders are required to verify your income by a third party, usually your Human Resource department, also. The information requested in this verification is things such as your annual or hourly salary, how many hours a week you work, your date of hire and your current position. All of these income items are gathered together in order for the lender to determine if you can qualify for the new loan. Employment history or income history always plays a very big role in today's qualification requirements.

Some refinance loans will also require bank statements or other asset statements. If you're not financing the closing costs and you're going to be required to pay them out of pocket, the bank has to verify that you have enough assets to make this payment. You'll need to provide your most recent asset statement showing these sufficient funds. And if the second lienholder requires you to pay down your line of credit as a part of the subordination, you'll also have to show the lender that you have sufficient funds to cover these requirements as well.

Be sure you provide all pages of the statements, even if the pages are blank. They're all numbered, so make sure you have them all. And any account information you may not think is relevant, you should still include if it's included on one of the pages of your bank statement.

And lastly of course, your credit will be checked to determine your credit worthiness and to show the current balances and payments on your debts. Credit standards have greatly tightened over the last few years, and it's important that you've paid all of your bills on time. Your credit score is one of the factors that will determine what kind of terms of credit you're offered, and if the subordination will be approved. It's important to not open up any additional credit cards or debt during to refinance process, as this could change their decision. And if you do decide to do so, you should inform your lender as soon as possible so they can update your paperwork.

So now that you have a basic idea of the items you'll need in order to get the conditional approval and start to subordination process, let's take a look at some of our other examples and exactly what you should do to start the process. The first thing is simple, pick up the phone and contact your existing second lienholder. They're most likely going to have a checklist of items they'll want from you in order to start the subordination process, like we talked about.

This is things like the appraisal, income documentation, details on your new first mortgage. All of this will be considered, and each bank's requirements will be slightly different. So again, step one, pick up the phone, contact the servicer of your existing second mortgage, and ask them how to start the subordination process.

So one of the things we said they may require is details on the new first mortgage. Let's take a look at why this is a big deal. Well, if you're increasing the balance on the new first mortgage, you're actually going to make the situation worse for the second mortgage holder.

Think about it. If you're paying closing costs as a part of the new refinance, and you're going a finance these costs in, it's going to increase the balance on the new mortgage. Let's say you financed $5,000 in costs. Now Mortgage C from our example earlier would have to be for $85,000 instead of $80,000 in order to pay off both the $80,000 Mortgage A and finance the $5,000 in closing costs.

Well, let's look at our example. In the event of foreclosure, if the home sells for $100,000, now that the new Mortgage C is for $85,000 the first $85,000 goes to Mortgage C, leaving only $15,000 for the old Mortgage B, the second mortgage. So now the second mortgage holder will lose that $5,000. So you can see, they're most likely not going to allow you to increase the balance on the new first mortgage as a part of the subordination process. Many second mortgage holders are going to limit the amount you can increase the mortgage, and most likely will require you to pay the closing costs out of pocket. This makes it even more important to shop around for the mortgage, because high lender fees could stand between you and getting the subordination agreement you need to refinance your loan.

In addition to financing closing costs, if you try to get cash out or any money back at the closing on the new refinance, this'll be a big issue for the second mortgage holder. Anything that raises your balance and worsens their position in the event of default is going to be a red flag and an issue.

One other thing to consider is that if your first attempt to subordinate the second lien is declined, you have to think of it is a negotiation. Go back to the bank, offer to pay down some of the balance, offer to make bigger monthly payments, or a higher rate, or whatever you can do to try to entice them to agree to what you want, and that's the subordination.

Keep in mind, most banks do require that fee we talked about, which can range from $100 to $300. So the subordination agreement is going to cost you something. And if the changes to the terms happen after you start the process, it may result in additional fees.

Using these tips, you should be able to tackle that pesky second mortgage and hopefully get it subordinated, allowing you to take advantage of today's low rates through a refinance program. If worse comes to worse, you could always hire an attorney to help negotiate on your behalf with the second lienholder if you run into problems. You just have to weigh the amount of money you're going to save with the new refinance with the amount of money you're going to invest in getting that pesky second mortgage to refinance.

I hope you enjoyed today's show. It's a great beautiful day here in Central Florida, and I've got to get off to the chili cook-off. That's right. Today in Baldwin Park starting at noon is the Orlando Chili Cook-Off, sponsored by my company, RP Funding, benefiting Special Olympics Florida. It's going to be a great day out there, a lot of fun. There's going to be tons of chili. I think we have almost 1,000 gallons of chili being cooked. It's a great family event. We've got a huge kid's zone for the kids. Tickets are $12 at the door, kids under 12 get in free. And I'm going to leave you now with some footage of last year's event, and I hope you see you out there. So make it a great weekend, and hopefully we'll see you in Baldwin Park today at noon.

Be sure to join us again next week as Robert Palmer shares more ideas on how you can save thousands while making every day decisions. That's next Saturday at 10:00 AM, right here on Central Florida's TV 27.