Saving money with a New York CEMA on a Purchase

The reason I thought of starting this blog is because I realized that a lot of lawyers (and mortgage brokers) are not familiar with a mechanism known as an "assignment of mortgage", commonly referred to as a CEMA which stands for consolidation, extension and modification agreement. What you need to know now is that an assignment of mortgage or CEMA can save you thousands of dollars on the New York State mortgage recording tax.

The CEMA has been utilized in commercial purchases and refinances for years and I think that most people who are at all familiar with it think that it is only available with commercial properties and refinances for residential properties. The truth is that it can be used in residential transactions as long as all banks agree to participate. You'll see why below.

In order to briefly explain how a CEMA works, I have to give an example. You can skip that part and just tell your lawyer or mortgage broker that you would like to try to do a CEMA or read on.

In New York City the mortgage tax rate is 1.80% of the mortgage amount minus $25.00 of the amount of the mortgage up to $499,999.00 and 1.925% of the mortgage amount above $500,000.00. These rates are for one and two family houses and condominiums (not co-ops).

At this point, I have no choice but to get a little technical.

The way a CEMA benefits a buyer is that you would only pay the mortgage tax on what is called "new money". That is, the principal balance of the mortgage above and beyond the principal balance of the seller's mortgage. An example will clarify this.

Lets assume that you are buying a house or condo for $400,000.00 and borrowing $360,000.00. In this case, your mortgage recording tax will be $6,450.00.

Now, lets assume that the seller of the house/condo, has a mortgage with a current principal balance of $260,000.00. In this example, the "new money" is $100,000.00 ($360,000.00 less $260,000.00). If you were to utilize a CEMA, you would only pay mortgage tax on $100,000.00 which would be $1,770.00. In this example, the mortgage tax would be reduced by over $4,500.00.

You should know that there are fees associated with a CEMA. Every transaction is different but you can expect to pay (a) the old lender a fee for the preparation of the required paperwork; (b) the attorney for your lender for the additional work (as this is not included in the base fee of the bank attorney); (c) your attorney for additional work in coordinating the process [I usually charge about $500.00 for this] and (d) the title company for additional recording fees. These fees are generally fixed meaning they have nothing to do with the amount of the mortgages but you can expect them to be approximately $1,500.00. Still, a savings of $3,000.00.

How does a CEMA happen? When I represent a buyer, the first thing I do is ask that a clause be added to the contract of sale which says something to the effect that the seller will cooperate with purchaser, at no cost to seller, to effectuate a CEMA and I contact the current lender and request that the CEMA documents be prepared. This is usually the hardest part of the deal because customer service reps in New Mexico have no idea what you are asking them for when you say you want a NY Purchase CEMA. Sometimes the old lender asks for a fee, (Wells Fargo and Bank of America for example, ask for about $1,000.00 up front) and this is the buyer's responsibility. Once the papers are drawn up, they are forwarded to the new lender who will make sure that they are acceptable. There is usually some back and forth because banks usually don't get anything right the first time but eventually, the proper form and language is agreed to and the original documents are delivered to the closing. At times, the old lender retains an attorney who attends closing (as if there are not enough lawyers at the table already) and other times they could ask that one of the other attorneys act as their agent to accept the papers. One way or another, it usually works out.

Unfortunately, there are some instances where a CEMA just does not work or make sense. A bank does not have to agree to participate. When they do, it is merely an accomodation. Either your lender, or the old lender, may decide that they dont want to be bothered and there is not much you can do. Other times, it may not make sense as the old mortgage may be too low so that any savings may be wiped out by the additional fees. Also, the process could take a few weeks to over a month and so if time is an issue, this probably is not a great idea.

I always recommend that my clients try to do a CEMA. When the banks agree and there is at least some savings, it cannot hurt to save even just a few dollars. The money is better and more useful in your pocket.

From my experience, most lawyers (and mortgage brokers) do not advise buyers of the CEMA option so if you are buying, make sure to ask about it.