Junior Mortgages
A junior mortgage may also be refrenced as “secondary financing.” In other words, this is a second mortgage an owner takes on the property. There could be several reasons to leverage the value of the property such as paying for debt or school, purchase an investment, or expanding a business. There are two main factors to consider when taking out a second mortgage.
First, note that the second mortgage is secondary to the primary mortgage. This means that in the event of a foreclosure by the first mortgage, the first mortgage will have their debts paid first. This also means that if the secondary mortgage forecloses, the first mortgage will remain as a creditor.
Second, junior mortgages come with more risk to the lender (because foreclosure priority is secondary). For this reason, interest rates on junior mortgages tend to be higher. Consequently, secondary mortgages tend to be paid off sooner.
Protecting the Junior Mortgage
Besides increasing the interest rate to mitigate against risk, junior mortgages also take steps to verify the outstanding loan amount of senior loans and looks for provisions that require automatic notification to junior mortgages (because junior mortgages need to notify senior mortgages of their rights to the security to recover anything at all). Additionally, time has passed before the second mortgage has been taken so there are improvements to the land or other assets the mortgage can attach to, which sometimes overlaps with priority assets. In this instance, the priority mortgage may need to marshall assets and collect against those where the secondary mortgage has no rights first.
To marshall, the court will rank the assets in order of priority and require senior creditors to proceed against those assets that are not subject to secondary liens.
In re Martin
873 P.2d 417 (Okla. 1994).
Rule
If a marshaling order is granted:
- First collect against those assets where you have sole priority.
Holding
Can’t marshal against a homestead. Reversed
Facts
Martin had three properties:
- A homestead valued at 53,250
- The farm valued at 45,600
- and mineral rights valued at 50,000.
Martin also has three debt obligations:
- Small Business Administration (SBA) has a first lien on the homestead and a second lien on the farm for 44,057.
- State of Oklahoma/Commissioner of the Land Office (CLO) had the first lien on the farm for 40,500.
- The Oklahoma Bank & Trust Co. had first priority in the mineral rights and second priority on farm for 151,000.
The Bank requested a marshaling order.
Analysis
Although marshaling is permitted in most situations, the Oklahoma statute prevents marshaling against a homestead. Thus, the request of the bank to marshal is denied.
Mortgage Subordination
The general principle for the order of mortgage priority is “first in time, first in right.” This principle may be altered somewhat by the state’s recording statures. Additionally, mortgage subordination can be modified contractually, usually through a Subordination Agreement.
Ranier v. Mount Sterling National Bank
812 S.W.2d 154 (Ky. 1991).
Question
Whether the subordination agreement extends to only 125,000 or also extends to an additional 75,000 promissory note.
Holding
The actions of the Bank were not within standards of good faith and fair dealing. Reversed.
Facts
The Nolans had entered into a mortgage with Ranier for 200,000 on a home. Later, the Nolans applied for a loan and mortgage with the Mount Sterling National Bank for home improvements. The only way the bank would approve the loan is if Ranier agreed to subordinate her mortgage to the bank. Ranier agreed that the sum of 125,000 would be subordinated. Later still, the Nolans were approved for an additional loan from the bank for 75,000 that was not secured (Ranier was not informed of the additional loan). As the Nolans were making payments, the bank was first putting the money towards the 75,000 and did so without informing Ranier.
Once the Nolans were in default, the bank took all the foreclosure proceedings to cover the balance of the 75,000 and 125,000 and Ranier received the remainder, about 36,000.
Analysis
Although the bank is free to make additional unsecured loans and to pay the interest to unsecured loans first, they are required to inform a third-party creditor (when they are subordinate due to a subordination agreement) of those actions. Here, the bank is getting the benefit of the priority and then acting in bad faith by not giving notice to Ranier, especially when her intent was to give the bank priority for only 125,000, not an additional 75,000.
Wrap-Around Mortgage
A wrap-around mortgage is a junior mortgage that wraps around the senior debt. This is typically used in seller-financed purchases through installment contracts. The way it works is borrower sends money to junior lender to pays money to the senior lender.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
