The law surrounding subordination agreements is complicated and there are many subtleties that only an experienced lawyer can analyze. If you need help preparing an agreement or need an analysis of the terms of the contract, please contact the experienced lawyers at Bremer, Whyte, Brown & O`Meara LLP for advice. If there is not enough equity to cover what is due on your second lien, the HELOC lender will lose money. Subordination can`t magically repay loans, but it helps lenders assess risk and set appropriate interest rates. Simply put, a subordination agreement is a legal agreement that states that one debt ranks behind another debt in priority to recover a debtor`s repayment. It is an order that changes the position of privilege. Without a subordination clause, loans have chronological priority, which means that a trust deed for the first time is considered to take precedence over all trust securities registered thereafter. As such, the oldest loan becomes the main loan, with the first call of the proceeds from a sale of a property. However, a subordination agreement recognizes that the claim or interest of one party is lower than that of another party if the borrowing entity liquidates its assets. In addition, shareholders are subordinated to all creditors.
Under California Civil Code Section 2953.3, all subordination agreements must include the following: A breach of contract may occur if the party refuses to sign the subordination agreement to subordinate its security right.