What is the effect of a subordination clause in a secured real estate loan?

• A. A prior lien holder permits subsequent liens to step ahead in priority.
• B. A prior lien holder automatically foregoes its priority.
• C. All liens must be paid before the mortgage can be issued.
• D. It allows the borrower to extend the loan without penalty.

Answer: (A)

Subordination clauses change the order in which liens are paid by agreeing that a later, otherwise junior lien will take priority over an earlier one. In real estate financing, liens get priority based on recording date, so the first lien is paid first if there’s a liquidation. When a subordination clause is used, the holder of the existing lien agrees to let a newer lien have priority, effectively moving the older lien down the line. This doesn't erase or eliminate the existing claim; it just rearranges who gets paid first from the property’s sale proceeds.

That’s exactly what the statement describes: the prior lien holder permits subsequent liens to step ahead in priority. The other ideas—foregoing priority entirely, requiring all liens to be paid before a mortgage can be issued, or extending the loan—don’t reflect how a subordination clause actually works.