What is a CEMA?

A CEMA is a Consolidation, Extension and Modification Agreement between two lenders regarding an existing mortgage. In a CEMA you are essentially taking over the seller’s existing mortgage. You will get a new mortgage from your lender at current interest rates, but you avoid recording a new mortgage and triggering the mortgage recording tax on the principal balance of the existing mortgage.

The theory behind the CEMA: if a seller of real property already has a mortgage on the property and the mortgage recording tax has already been paid, the buyer shouldn’t have to pay the tax on that portion of their mortgage.

What are the minimal requirements to effectuate a CEMA?

1. You must be buying real property (a co-op is not considered real property and is not subject to mortgage recording tax).
2. Both the seller’s lender and your lender agree to the CEMA.
3. The seller agrees to the CEMA. Typically, if the buyer agrees to cover the costs of the CEMA (legal fees and lender’s fees), the seller will agree, as it will cost them nothing except, potentially, time. Sometimes, the seller will request to share in the benefit of the CEMA.

Buyers of condos, townhouses or other types of houses get hit with mortgage recording tax. In most residential purchases this amounts to 1.8% (for loans of $500,000 or lower) or 1.925% (for loans above $500,000)mof the principal amount of the mortgage loan you are borrowing.

This tax only applies to condo and house buyers because condos and houses are considered, in a legal sense, actual real estate. A loan secured by real estate is called a “mortgage loan” and is recorded in the public land records.

When you buy a co-op, you are not buying real estate. Rather, with a co-op, you buy (i) shares in a corporation that owns real estate and (ii) a corresponding proprietary lease from that corporation which entitles you to the apartment you are “buying”. When you take out a loan to purchase a co-op, it is not secured by real estate. Instead, it is secured by the shares in the corporation you are purchasing. As a result, it is not considered a “mortgage loan” in the legal sense, even though everyone colloquially referred to it as one, and it is not subject to the mortgage recording tax. This is one of the main reasons the closing costs on co-ops are far less than those on condos or homes.

How can a CEMA save home buyers money?

If both the seller’s lender and the buyer’s lender agree to the mortgage assignment, then a CEMA will be entered at closing. The CEMA takes the existing mortgage on the property (for which the mortgage recording tax has already been paid) and consolidates it with a new mortgage from the buyer’s lender for the remainder of the amount the buyer needs to borrow. The buyer will only need to pay mortgage recording tax on the portion of the mortgage that is not being assigned.

For example, if a buyer needs a $2,000,000 mortgage to buy a property, and the seller already has a $1,000,000 mortgage on the property, if a CEMA is entered, the buyer will only have to pay mortgage recording tax on the $1,000,000 portion of his $2,000,000 mortgage for which mortgage recording tax has not already been paid. In this example, the CEMA will save the buyer $19,250 in closing costs. Subtract out the few thousand you will have to pay for legal fees and administrative fees, and you’ve saved over $15,000. It costs the seller and the banks nothing, but it can be pretty meaningful to the buyer.

Why don’t we see CEMAs more often?

Many banks don’t permit CEMAs simply because they don’t understand them. These large national organizations get caught up in the beaurocracy. CEMAs are incredibly easy to do and often save home buyers tens of thousands of dollars in closing costs. There are a few banks that have a huge presence in New York, and these banks agree to CEMAs. We need to somehow get more banks on board with them, so CEMAs become a standard part of a condo or home transaction.

Make Home Buying More Affordable in New York with a CEMA (and a #DigsRebate)

Lenders always agree to mortgage assignments on commercial real estate transactions with an existing mortgage on the property, so there is no reason why they cannot join their program with residential loans. This would be a very beneficial lobbying effort on behalf of residential real estate purchasers.

Choose the right bank to finance with

If you are buying a house or a condo with financing, work with Wells Fargo or Citizens Bank. They both provide great service and do CEMAs. I would be happy to provide referrals to excellent loan officers there.