First, second trust lenders must be privy to refinance plans

Dear Ms. Mortgage Maven,I wanted to do a cash-out refinance to pay off some bills, specifically a $15,000 lien on my property. I have a first and second trust and I was supposed to refinance them both with a stated-income loan for 90% of my home's value. (My home has increased significantly in value since I bought it.) However, the mortgage lenders have recently tightened their lending guidelines and this type of loan is no longer available to me. Do you have any suggestions?

Call me Curious.

Dear Curious,

I have a suggestion, but I cannot guarantee that it will work. You say that you have a first and second trust on the property already. You were going to roll those two loans into one loan, and get an additional amount of money to pay off a lien. Due to the recent turmoil in the mortgage market, mortgage lenders have either closed their doors or tightened their lending guidelines, and your intended loan programs seem to have been one of the casualties in this credit crunch. Your stated income loan, if it had gone through, would have ultimately been packaged as a mortgage-backed security with similar types of loans and sold on the bond market. However, investors - the institutions who buy mortgage-backed securities for their investment portfolios - have lost their appetite for stated income loans with a high loan-to-value ratio, in your case 90%.

I suggest trying to do a cash-out refinance of just your first mortgage and increase your first trust by $15,000 (plus closing costs, if possible). To do so, your second trust lender would have to agree to subordinate its loan to the new first trust. Subordination is necessary because property liens are positioned in the order in which they occur. The first trust mortgage is recorded first and in first position to be paid in the event of foreclosure. The second trust is recorded second and is in second position to be paid in the event of foreclosure.

If a property goes to foreclosure, the second trust lender is in a precarious position - the proceeds of the sale may or may not cover the costs of both the first and second trusts. (If you go to a foreclosure auction at an auction house, you may find that the second trust lien holder has actually sent someone to the auction on its behalf, to bid up the price of the house so that the winning bid will be for an amount sufficient to repay both the first and second trust holder.)

When you pay off the existing first trust with the newly refinanced loan, the current second trust lender will then be in first position, even if the loan balance is for a small fraction, say 10% of the original purchase price. Since the new loan will be recorded after the original second loan, the new loan would now be the new second trust holder. No lender will make you a new loan for 80% of the current market value of the property and agree to be in second position. That is why the current second trust holder must agree to subordinate its loan to the newly refinanced first trust.

There is no guarantee that the second trust lender will do so, but I think that since you are using the proceeds of the loan to pay off a lien against the property (as opposed to paying off a car or credit card debt), the second trust lender may be enlightened enough to agree. Best of luck,

Jessica White, also known as "Ms. Mortgage Maven," is a mortgage consultant with Tenacity Mortgage, a division of Tenacity Group, the Capital Region's leading financing, real estate advisory and tenant condominium-conversion company. Call or email her to discuss your home purchase or refinancing needs. She can be reached at 202-607-4449 or Jessica@msmortgagemaven.com. You can also apply online at www.msmortgagemaven.com.