A Consolidation, Extension & Modification Agreement (CEMA) is an agreement that, as its name implies, consolidates two or more mortgages, extends the term of the obligation secured by them, and modifies its terms.

It is used to avoid mortgage tax, which is calculated based upon the amount of “fresh money” being loaned. Typically, the new lender acquires the existing mortgage and the loan secured thereby by assignment. The lender then makes a new loan for the difference between the original mortgage being assigned to them and the loan it had committed to make and then combines the two together by executing a CEMA to form a single lien that secures the Consolidated Note containing the modified terms.

For example, if someone buys a residence for $500,000 and finances the purchase with a $400,000 mortgage loan, he/she will incur mortgage tax calculated on the $400,000. The formula to calculate the tax the borrower must pay varies by county and ranges from 0.75% to as much as 1.975% in New York City, for mortgages in excess of $500,000.

If the property were encumbered by an existing $300,000 mortgage and the new lender, instead, took the $300,000 existing mortgage by assignment, made a new loan of $100,000, and consolidated them via a CEMA into a $400,000 lien, the purchaser/borrower will only incur mortgage tax calculated on $100,000, the amount of the “new loan.” Thus, by executing a CEMA, the borrower would save the thousands of dollars of mortgage tax that would otherwise be computed on the $300,000 difference!

Since this savings are so substantial, CEMAs are frequently used, often in conjunction with the purchase of a condominium unit. When this occurs, it creates an issue as to the priority of the CEMA and the condominium’s lien for common charges, which arises from a unit owner’s failure to pay the monthly fees required to maintain the common areas.

Since the condominium’s lien, pursuant to Real Property Law § 339-z, has priority over all other liens, except the first mortgage, regardless of the date the condominium’s lien is filed, the priorities between a condominium lien and a CEMA, which consolidated a 1st mortgage and a 2nd mortgage will be determined based upon whether or not the CEMA is considered to be a single first lien. In other words, does the CEMA have priority over the condominium lien since it is now a single first lien, or does the condominium lien have priority over part or all of the CEMA?

In Bankers Trust Company v. Board of Managers of Park 900 Condominium, the Court of Appeals, New York’s highest court, answered this question by definitively ruling that a CEMA consolidating two liens into one creates a single first mortgage which has priority over the condominium’s lien, as long as both of the mortgages consolidated by the CEMA were recorded prior to the recordation of the condominium’s lien.

Please feel free to contact me with questions or comments at peter.roach@roachlawfirm.com.

Peter Roach

Peter T. Roach & Associates, P.C.