What Is a CEMA (Consolidation, Extension, and Modification Agreement)?

A Consolidation, Extension, and Modification Agreement, commonly known as a CEMA, is a financial instrument primarily relevant to mortgage transactions in New York State. This agreement allows for the restructuring of existing mortgage debt, often in conjunction with new financing, by combining prior mortgage obligations with new loan funds under modified terms.

Core Components and Purpose of a CEMA

A CEMA involves three distinct actions: consolidation, extension, and modification. Consolidation refers to combining an existing mortgage or mortgages with new loan funds into a single, unified mortgage obligation. Extension typically involves extending the term of the original mortgage to align with the new loan’s repayment schedule. Modification allows for changes to the terms of the original mortgage, such as interest rates or other conditions, to reflect the new financing arrangement.

The primary purpose of a CEMA is to reduce the mortgage recording tax, which is a significant closing cost in New York State. New York imposes a tax on recording new mortgages, applicable to both purchases and refinances. By utilizing a CEMA, borrowers can avoid paying this tax on the entire new loan amount, instead only incurring the tax on the “new money”—the difference between the existing mortgage balance and the new, higher loan amount. For example, if a homeowner has a $500,000 mortgage and refinances for $700,000, a CEMA would allow them to pay recording tax only on the $200,000 difference, rather than the full $700,000. This tax-saving mechanism makes CEMAs beneficial for eligible transactions, especially in areas with higher mortgage recording tax rates.

The CEMA Process and Parties Involved

The CEMA process typically begins when a borrower seeks to refinance an existing mortgage or, in some cases, purchase a property with an existing mortgage. The borrower applies for new financing, and their new lender determines if a CEMA is a suitable option for the transaction. This decision often hinges on the potential mortgage recording tax savings outweighing the additional costs and complexities of a CEMA.

Key parties involved in a CEMA transaction include the borrower, the new lender, the existing lender, the borrower’s attorney, and a title company. The borrower’s attorney plays a central role in reviewing the CEMA documents and ensuring the transaction aligns with the borrower’s interests. The new lender will work to consolidate the existing mortgage with the new funds. The existing lender must agree to assign their mortgage to the new lender. The title company is responsible for ensuring clear title and handling the recording of the consolidated mortgage documents. The overall process can be more complex and time-consuming than a traditional refinance, often taking around 75 days to close, compared to 30 days for a standard refinance.

Associated Costs of a CEMA

While CEMAs offer significant mortgage recording tax savings, borrowers will incur various associated costs. These typically include legal fees charged by attorneys for drafting and reviewing the complex CEMA documents. Both the existing lender and the new lender may charge CEMA-specific fees, such as assignment and processing fees.

Title insurance premiums are also a factor, particularly for the “new money” portion of the loan. Additional recording fees for the CEMA document itself, the new money mortgage, and any assignments are also part of the expense. Borrowers must carefully evaluate these additional fees against the potential mortgage recording tax savings to determine if a CEMA is financially advantageous for their specific situation.