Mortgage Assignments and the CEMA (Consolidation, Extension and Modification Agreement)

Homebuyers in NYC have grown accustomed to absurdly high sale prices and an unusually long and oftentimes puzzlingly complicated process to get from contract to closing.  They also have to deal with some of the highest closing costs in the country, including the so-called “Mansion Tax,” a 1% tax on the gross purchase price if you spend $1MM or more on a home, which gets you, in most of Manhattan, a nice 1br apartment.  Buyers of condos, townhouses or other types of houses, however, get hit with another tax – the mortgage recording tax, which, in most residential purchases, amounts to 1.8% or 1.925% of the principal amount of the mortgage loan you are borrowing to make the purchase (the former, for loans of $500,000 or lower, and the latter, for loans above $500,000).  This tax only applies to condo and house buyers because condos and houses are considered, in a legal sense, actual real estate, and a loan secured by real estate is called a “mortgage loan” and is recorded in the public land records.  Some buyers of condos, townhouses and houses try to use a mortgage assignment and a CEMA to reduce the mortgage recording tax owed (detailed further below).

Note that when you buy a co-op, you are not buying real estate, but rather (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, but rather the shares in the corporation you are purchasing, and, accordingly, it is not considered a “mortgage loan” in the legal sense, even though it is colloquially referred to as one, and is not subject to the mortgage recording tax.

The mortgage recording tax is assessed on all mortgage loans in New York State.  A lender cannot record a mortgage against a property (and, thus, properly secure its interest in such property) unless the mortgage recording tax is paid.  But, buyers (and their lawyers) are smart, and came up with the CEMA as a way to get around paying a portion of the mortgage recording tax.  The theory behind the CEMA is that, if a seller of a property already has a mortgage on the property for which the mortgage recording tax has already been paid, and their lender assigns that mortgage to the buyer’s lender for consolidation into the buyer’s mortgage, why should the buyer have to pay the tax on that portion of their mortgage?

They should not, but often they do.  Let me explain.

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 to purchase the property.  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 $1,000,000 mortgage to buy a property and the seller already has a $600,000 mortgage on the property, if the seller’s bank agrees to assign the mortgage to the buyer’s lender, then the buyer will only have to pay mortgage recording tax on the $400,000 portion of his $1,000,000 mortgage for which mortgage recording tax has not been paid.  In this example, the CEMA will save the buyer $11,550 in closing costs – real money!

But, most of the time, banks do not permit CEMAs to be entered into at closing for home purchases – and there is no good reason for not permitting them.  They literally don’t permit them because they are large national organizations and simply do not understand mortgage assignments because it is unique to the New York market.  It is one of the most absurd things because it is so easy to do and often saves homebuyers tens of thousands of dollars in closing costs!  I just closed an $8.7MM purchase of a gorgeous house in Brooklyn Heights that my client financed with a $5.65MM loan.  There was already a loan on the property for $3.3MM, but his bank (Bank of America) refused to do a CEMA, so my client lost out on savings of $63,525!  Crazy and senseless!

There is a very clear and admirable goal in New York to make homebuying more affordable, and we at Digs are at the forefront of that trend, by giving our clients the most generous real estate broker commission rebates in the brokerage community – up to 2% of the purchase price cash back at closing!  For a condo purchase over $1MM with financing, however, without a CEMA, the real estate broker commission rebate will likely not even cover the buyer’s total closing costs, which is completely absurd!  So lenders need to get on board with CEMAs.  Lenders always agree to mortgage assignments on commercial real estate transaction with an existing mortgage on the property, so there is no reason why they cannot join the program with residential loans.

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.

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