Bulletin: VA2020003

Dear Associates:

Section 55.1-319 of the Code of Virginia (the former section 55-58.3) provides for the "automatic" subordination (i.e., without the necessity of recording a deed of subordination) of an existing second mortgage lien when a first mortgage is refinanced.  To qualify for this treatment, the refinance of the senior lien must meet rigid guidelines specified in the statute. This Bulletin will revise the requirements for compliance with 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 ______________."

NOTE: This "automatic" subordination section does not apply if the junior deed of trust secures an original principal amount in excess of $150,000.00. The new principal amount of the refinanced mortgage cannot be more than the existing principal balance of the old mortgage plus $5,000.00.

Section 55.1-319 states that the interest rate “stated” in the refinance deed of trust cannot exceed the interest rate “set forth” in the old deed of trust. As such the applicable interest rates must be stated in both the old and new first deeds of trust. The interest rate is often not set forth in the deed of trust being refinanced. If the interest rate is not specified, the refinance does not comply with the statutory requirements and you cannot rely on automatic subordination – any and all junior liens must be subordinated of record. If either the old or the new mortgage has a variable or adjustable 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.

Section 55.1-319 excludes certain second mortgages from being subordinated under the statute:

The provisions of [this section] shall not apply to a subordinate mortgage securing a promissory note payable to any county, city or town or any agency, authority or political subdivision of the Commonwealth if such subordinate mortgage is financed pursuant to an affordable dwelling unit ordinance adopted pursuant to §15.2-2304 or §15.2-2305, or pursuant to any program authorized by federal or state law or local ordinance or resolution, for (i) low- and moderate-income persons or households or (ii) improvements to residential potable water supplies and sanitary sewage disposal systems made to address an existing or potential public health hazard, and which mortgage, if recorded on or after July 1, 2003, states on the first page thereof in bold or capitalized letters: "THIS (DEED OF TRUST, MORTGAGE OR OTHER SECURITY INTEREST) SHALL NOT, WITHOUT THE CONSENT OF THE SECURED PARTY HEREUNDER, BE SUBORDINATED UPON THE REFINANCING OF ANY PRIOR MORTGAGE."

Therefore, if you are asked to insure the refinance of a first mortgage on which a subordinate mortgage of the type described above exists, you must require the receipt and recordation of a written Subordination Agreement from the subordinate lien holder. This would apply, for example, to an ADU loan from the Arlington County Housing Administration.

The restriction on automatic subordinations does not apply, however, to assistance loans from private foundations, such as Habitat for Humanity. These loans may still be subordinated under the statute.

If all the above conditions are met, a second mortgage that is junior to the lien of a first deed of trust being refinanced will remain in its subordinate position without a signed and recorded Deed of Subordination.

We have attached a revised “Automatic Subordination Checklist”.

You must complete the checklist and email it to underwriting counsel. No other documentation must be provided. Underwriting counsel will acknowledge receipt by return email to document approval for your file. You may then insure the refinanced Deed of Trust in reliance on section 55.1-319. 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 §55.1-319, Code of Virginia." You may also issue the ALTA Short Form Loan Policy with the appropriate recitations on an attached addendum.

If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.

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