Bulletin: NL000027

Dear Associates:

Specific Subordinations.

We always require that the subordination of lien be specific as to the particular transaction. See referenced form at the end of this bulletin. Your state may have different requirements for the form.

We also require that a corporate resolution authorize the subordination.

Automatic Subordinations.

We do not rely upon blanket, automatic or general subordinations. Many courts refuse to enforce automatic subordinations to future construction loans.

Banks and Savings Institutions.

Subordinations by savings institutions or banks are avoidable if they are "secret agreements". Federal law says that agreements shall not be valid against the FDIC or RTC (when taking over a bank or savings institution) unless the agreement is:

• in writing,
  
  
• executed by the parties contemporaneously with the acquisition of the asset by the institution,
  
  
• approved by the board of directors or loan committee of the institution as reflected in the Minutes, and
  
  
• an official record of the institution.

To rely on mortgage subordinations executed by banks or savings institutions, require the following:

• The subordination must specifically describe the transaction. The subordination is acceptable only if:
  
  
  • the subordination is executed at the same time as the mortgage in favor of the bank or savings institution; or
    
    
  • the bank or savings institution subordinates to a construction loan; or
    
    
  • the bank or savings institution receives a portion of the principal in return for the subordination.
    
    Secure evidence that the board of directors or loan committee of the bank or savings institution approved the subordination. The Minutes of the board or committee must reflect approval.

You do not need to require a corporate resolution if:

• the subordination is specific to the transaction; and
  
  
• the mortgage covers a single-family residence; and
  
  
• the new first mortgage refinances a mortgage that was prior to the subordinating lender.

If your underwriting agreement or state standards (such as CLTA Manual requirements) make additional requirements, also comply with those requirements.

Should you be unable to secure this documentation, please call our underwriting personnel.