With interest rates so low right now, there has been
a wave of refinances. There are tremendous savings
for borrowers to reduce their interest rates on their
home loans.
A large percentage of borrowers have both a first
loan and a second loan on their homes. Many times
the second loan is the popular Home Equity Line of
Credit (HELOC) which borrowers like to have
available to use in case of emergencies, or if an
opportunity presents itself.
When a borrower requests a refinance, and if there
is a second loan on the property, we need to make
sure that the borrower understands their options.
Assuming that the property value supports the
loan request the borrower may elect to:
A. Payoff the first loan and the second loan and
close the HELOC.
B. Payoff the first loan and the second loan and
retain the availability of the HELOC.
C. Payoff the first loan and retain the balance and
availability of the HELOC.
Each of these choices involve some different
considerations. Let's recap what needs to be done
to meet these different outcomes.
It is helpful to think of the loans on the property
as being rungs on a ladder. The existing first
loan is the top rung, the existing second loan is
the next in line.
When we refinance, the new loan that is being
created is designed to be the new first loan.
In scenario A, above, the new loan pays off
the existing first loan and existing second loan,
removing those rungs from the ladder and the
new loan becomes the top rung.
In scenario B, the new loan pays off the existing
first loan and pays the existing second loan to
a zero balance, but does not close out the HELOC.
In scenario C, the new loan pays off the existing
first loan and does not pay to zero or close out
the existing HELOC.
In scenarios B and C, the existing first loan is
gone, removing the top rung of the ladder.
However, whether the balance is zero or not,
the existing HELOC is now the top rung of the
ladder and the new loan is in the second position.
But wait, the new loan is supposed to be in first
position. What can be done?
This is where the process of subordination comes
into play. In this case, subordination refers to
the situation where the existing second lender
agrees to move their loan back down to a secondary
position to the new first loan that is being created.
As a practical matter, the new first lender will
have guidelines and requirements that not only
stipulate the percentage of value that the first loan
can be (loan-to-value ratio or LTV), but will also
have requirements for the percentage of value
that the combination of the new first loan and
existing HELOC can be (combined loan-to-value
ratio or CLTV).
Additionally, the existing HELOC lender will also
have CLTV guidelines and requirements. As a
general rule, they do not want to be in a largely
riskier position when approving the subordination
request.
Let's take a look at a couple of examples.
Property value $500,000.
Existing first loan $300,000. (LTV = 60%)
Existing second loan $100,000. (CLTV = 80%)
New loan request of $300,000 to replace the
existing first loan. (LTV = 60%)
In this case, the existing HELOC lender is in a
reasonably secure position, with their exposure
to risk at the 80% level. Under the new loan
request, they are being asked to consider keeping
their exposure to risk at the 80% level. There is
a good likelihood that they would approve the
subordination request without modifying the
amount of the HELOC.
Property value $500,000.
Existing first loan $300,000 (LTV = 60%)
Existing second loan $100,000 (CLTV = 80%)
New loan request of $400,000 to payoff first
loan and pay HELOC to zero. Wants to retain
availability of the HELOC going forward.
In this case the new LTV would be 80%. The
request to the existing lender to subordinate
their HELOC would put their exposure to risk
at 100% ($400,000 first loan and $100,000
available on the HELOC). It is highly unlikely
that the lender would approve this subordination
request and would probably insist that the
HELOC be closed out, since the lender will not
want to increase their risk exposure to that
level.
Subordination requests are useful tools to help
a borrower meet their financial planning goals.
But it takes proper research to make sure that
we can navigate through the guidelines of both
the new first lender and the existing HELOC
lender.
Also, borrowers need to be patient as well. We
are finding that the HELOC lenders are taking
as much as 30-45 days to process these requests.
This can affect the ability to meet interest rate
lock expiration dates, or become more costly to
the borrower if rate lock extension fees are
necessary.
Make sure that your goals are well-defined as
you beginn this process to that a strategic plan
is developed to avoid any pitfalls through the
process.
Wednesday, October 20, 2010
Wednesday, October 6, 2010
Meeting the Client's Needs
I recently had a couple of reminders about how
important it is to meet our clients' needs.
Those of us in the service business need to remember
that it is the clients' perspectives that are most
important, not necessarily our point of view.
The first reminder came the last time I was getting
my hair cut. I overheard the receptionist talking
with one of the stylists in the shop.
The receptionist was the one who made the
reminder calls for the appointments the day
before they were scheduled. Since she was
making calls for all the stylists, she had
thirty to fifty calls to make each day.
In order to get through the calls, she found it
useful to leave them as quickly as possible.
One of the customers had said to her that it was
difficult to understand her message because she
spoke so fast, and that the customer had to replay
it a couple of times to make sure of what was
being communciated.
After relating what the customer had said to her,
the receptionist said to the stylist (as if she was
talking to the customer): "You try making more
than thirty calls, and see how fast you leave the
messages".
What struck me about this brief conversation was
that the purpose of the call had been overlooked.
Although the receptionist was being efficient, the
purpose of the reminder call was to be caring and
welcoming to the customer. And if there was a
reason why the appointment couldn't be kept, to
open the lines of communication so that the stylist
didn't have an open appointment time.
Even though it may have been the receptionist's
thirtieth call, it was the first one received by that
customer. In an effort to get her task completed
as quickly as possible, the receptionist lost sight
of the fact that the customer was somewhat incon-
venienced by having to replay the message several
times.
It was a great reminder for me to constantly
recommit to serving my clients. Every one who
calls me for information, for rates or to help them
solve a problem deserves for me to treat them like
it is my first call of the day.
They are calling me to help them meet their goals,
for their reasons. I owe it to them to be patient,
considerate and thorough.
The second reminder came tonight. My wife Sheri
and I went to see Van Morrison in concert at the
Civic Theater in San Diego. It was the first time he
had performed in San Diego in 37 years!
He performed for about 90 minutes and I thought
he put on a great show. Even though he is 65 years
old, he brought energy, professionalism, and a
virtuosity to his concert.
I know that not all of my readers will know his
music, but at his age, how many times do you think
he has sang "Gloria", "Brown Eyed Girl", "Moon-
dance" and his other hits? Thousands, I am sure.
What struck me, was that even though these songs
have been sung by him an untold number of times,
this was my first opportunity to hear him live. And he
delivered a high-quality performance that respected
those in attendance and brought credit to his pro-
fessional reputation.
I suppose he could have just "mailed it in". But
that would serve no one. The audience would have
been justifiably disappointed and felt cheated.
Van Morrison would have diminished his reputation
as a performer by delivering a sub-par effort.
The lesson I took away from this was that I need
to always remind myself that my customer may
only have one encounter with me. I need to respect
their concerns and deliver the highest quality
service that I can in that encounter.
They may ask me to be part of their team of trusted
advisors for a period of time to help them meet their
goals. They are inviting me into their financial lives,
asking for my assistance, and paying me for my
services.
My clients deserve nothing less than my best effort
when we work together. And I can thank the salon
receptionist and a professional entertainer for the
reminders.
important it is to meet our clients' needs.
Those of us in the service business need to remember
that it is the clients' perspectives that are most
important, not necessarily our point of view.
The first reminder came the last time I was getting
my hair cut. I overheard the receptionist talking
with one of the stylists in the shop.
The receptionist was the one who made the
reminder calls for the appointments the day
before they were scheduled. Since she was
making calls for all the stylists, she had
thirty to fifty calls to make each day.
In order to get through the calls, she found it
useful to leave them as quickly as possible.
One of the customers had said to her that it was
difficult to understand her message because she
spoke so fast, and that the customer had to replay
it a couple of times to make sure of what was
being communciated.
After relating what the customer had said to her,
the receptionist said to the stylist (as if she was
talking to the customer): "You try making more
than thirty calls, and see how fast you leave the
messages".
What struck me about this brief conversation was
that the purpose of the call had been overlooked.
Although the receptionist was being efficient, the
purpose of the reminder call was to be caring and
welcoming to the customer. And if there was a
reason why the appointment couldn't be kept, to
open the lines of communication so that the stylist
didn't have an open appointment time.
Even though it may have been the receptionist's
thirtieth call, it was the first one received by that
customer. In an effort to get her task completed
as quickly as possible, the receptionist lost sight
of the fact that the customer was somewhat incon-
venienced by having to replay the message several
times.
It was a great reminder for me to constantly
recommit to serving my clients. Every one who
calls me for information, for rates or to help them
solve a problem deserves for me to treat them like
it is my first call of the day.
They are calling me to help them meet their goals,
for their reasons. I owe it to them to be patient,
considerate and thorough.
The second reminder came tonight. My wife Sheri
and I went to see Van Morrison in concert at the
Civic Theater in San Diego. It was the first time he
had performed in San Diego in 37 years!
He performed for about 90 minutes and I thought
he put on a great show. Even though he is 65 years
old, he brought energy, professionalism, and a
virtuosity to his concert.
I know that not all of my readers will know his
music, but at his age, how many times do you think
he has sang "Gloria", "Brown Eyed Girl", "Moon-
dance" and his other hits? Thousands, I am sure.
What struck me, was that even though these songs
have been sung by him an untold number of times,
this was my first opportunity to hear him live. And he
delivered a high-quality performance that respected
those in attendance and brought credit to his pro-
fessional reputation.
I suppose he could have just "mailed it in". But
that would serve no one. The audience would have
been justifiably disappointed and felt cheated.
Van Morrison would have diminished his reputation
as a performer by delivering a sub-par effort.
The lesson I took away from this was that I need
to always remind myself that my customer may
only have one encounter with me. I need to respect
their concerns and deliver the highest quality
service that I can in that encounter.
They may ask me to be part of their team of trusted
advisors for a period of time to help them meet their
goals. They are inviting me into their financial lives,
asking for my assistance, and paying me for my
services.
My clients deserve nothing less than my best effort
when we work together. And I can thank the salon
receptionist and a professional entertainer for the
reminders.
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