In the context of a lien, what does "subordination" mean?

Subordination refers to the process of lowering the priority of a lien, making it subordinate to another claim or lien that may arise later. This is a common practice in real estate and borrowing situations, especially when refinancing or obtaining additional financing. When a lien is subordinated, the lienholder agrees that another lien will take priority over their own in the event of foreclosure or liquidation. This can help borrowers secure new financing or modify existing loans, encouraging lenders to provide necessary capital while accepting a lower position in the event of default.

Understanding the concept of subordination is crucial, as it affects the risk and return profile for lienholders, and it helps clarify the order in which creditors will be paid should a property be sold or foreclosed upon.