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    Subordination Clause

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    Niño Rey Lopez
    A subordination clause is used in agreements to establish that an existing claim takes priority over any future claims formed by other agreements. It makes the current claim senior to any subsequent agreements. Subordination clauses are commonly found in mortgage refinancing agreements, where the original first mortgage requires the second mortgage to agree to remain in a secondary position through a subordination clause, even after the first mortgage is refinanced and replaced. The clause provides protection for the original debt holder by ensuring they have a higher claim on repayment than any later debts.

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    Subordination Clause

    Uploaded by

    Niño Rey Lopez
    23 views2 pages
    A subordination clause is used in agreements to establish that an existing claim takes priority over any future claims formed by other agreements. It makes the current claim senior to any subsequent agreements. Subordination clauses are commonly found in mortgage refinancing agreements, where the original first mortgage requires the second mortgage to agree to remain in a secondary position through a subordination clause, even after the first mortgage is refinanced and replaced. The clause provides protection for the original debt holder by ensuring they have a higher claim on repayment than any later debts.

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    A subordination clause is used in agreements to establish that an existing claim takes priority over any future claims formed by other agreements. It makes the current claim senior to any subsequent agreements. Subordination clauses are commonly found in mortgage refinancing agreements, where the original first mortgage requires the second mortgage to agree to remain in a secondary position through a subordination clause, even after the first mortgage is refinanced and replaced. The clause provides protection for the original debt holder by ensuring they have a higher claim on repayment than any later debts.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    23 views2 pages

    Subordination Clause

    Uploaded by

    Niño Rey Lopez
    A subordination clause is used in agreements to establish that an existing claim takes priority over any future claims formed by other agreements. It makes the current claim senior to any subsequent agreements. Subordination clauses are commonly found in mortgage refinancing agreements, where the original first mortgage requires the second mortgage to agree to remain in a secondary position through a subordination clause, even after the first mortgage is refinanced and replaced. The clause provides protection for the original debt holder by ensuring they have a higher claim on repayment than any later debts.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Subordination Clause

    A subordination clause is a clause in an agreement which states that the


    current claim on any debts will take priority over any other claims formed in
    other agreements made in the future. Subordination is the act of yielding
    priority.

    Breaking Down Subordination Clause


    When a home is foreclosed and liquidated for cash, the first mortgage lender
    gets first dibs on the sale proceeds. Any money that remains is used to pay
    down a second mortgage, and so on. The further down the mortgage tier
    a claimant sits, the less chance it has of recovering its loan amount. To adjust
    the priority of a loan in the event of default, a lender may demand a
    subordination clause, without which loans take chronological precedence.

    A subordination clause effectively makes the current claim in the agreement


    senior to any other agreements that come along after the original agreement.
    These clauses are most commonly seen in mortgage contracts and bond
    issue agreements. For example, if a company issues bonds in the market
    with a subordination clause, it ensures that if more bonds are issued in the
    future, the original bondholders will receive payment before the company
    pays all other debt issued after it. This is added protection for the original
    bondholders as the likelihood of them getting their investment back is higher
    with a subordination clause.

    Subordination clauses are most commonly found in mortgage refinancing


    agreements. Consider a homeowner with a primary mortgage and a second
    mortgage. If the homeowner refinances his primary mortgage, this in effect
    means canceling the first mortgage and reissuing a new one. When this
    happens, the second mortgage moves up the tier to primary status, and the
    new mortgage becomes subordinate to the second mortgage. Due to this
    change in priority, most first lenders require that the second lender provide
    and sign a subordination agreement, agreeing to remain in its original
    secondary position. Normally, this process is a standard procedure of a
    refinance. But, if the borrower’s financial situation has worsened, or if the
    value of the property has significantly declined, the second mortgage creditor
    may be unwilling to execute the subordination clause.

    If the second lien holder provides a subordination clause, it allows the primary
    mortgages on the same property to have a higher claim. Should repayment
    become an issue, such as in bankruptcy, the subordinate loans would fall
    behind the original mortgage, and may not be paid at all.

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