Tanta over at the Calculated Risk blog notes today that National City Corp. is apparently refusing to subordinate -- in other words, refusing to keep its original second mortgage in a subordinate lien position when a borrower looks to refinance their first mortgage. Per the Chicago Tribune, it appears that the bank isn't giving its reasons for the new policy:
A spokesman for National City, William Eiler, declined to provide the number of loan customers affected and said the bank's reasons were "proprietary." Asked whether blocking customers' ability to refinance could push some of them into foreclosure after payment resets, Eiler said: "We cannot predict that this might occur." The memo, a copy of which was provided to me, acknowledged that the new policy "may not be widely accepted by our customers."
Tanta speculates that the reason might be "fruitcake on a 1004," probably the most colorful description of appraisal fraud we've seen yet. If National City is refusing to subordinate because it doesn't know who did the appraisal and is concerned that values might be artificially inflated -- thus diluting its already-precarious second position -- the policy might actually make some sense. For one thing, we already know that home prices diverged sharply in the conforming market during the fourth quarter, depending on whether the transaction was a refinance or a purchase -- the folks at OFHEO aren't commenting to the HW newsroom as to whether their data indicates appraisal fraud, but we can't seem to think of any other reason. (Unless, of course, you really believe that refis are only taking place at the higher end of the traditional conforming limit, which seems downright silly.) For another, we know that both GSEs didn't waste any time agreeing to a new set of property valuation standards with New York AG Andrew Cuomo. Something tells us that January 1, 2009 -- when the new appraisal standards go into effect -- can't get here fast enough, at least for borrowers with a second lien that has National City's name on it.