Second Mortgage Borrower

New York State court of appeals recently ruled that a consolidating mortgage - often referred to as a "Consolidation, Extension, & Modification Agreement" or "CEMA" - is the first registered mortgage under the New York Real Property Law if there is no interim pledge.

But in 2000, the creditor prolonged a mortgage to a homeowner for $54,000 and booked the mortgage. In the following year, the borrower renewed another $38,000 mortgage and concluded a consolidating arrangement with the borrower that would consolidate the two loans into a mortgage charge that would be handled as a mortgage totalling $92,000.

A second mortgage and the contract of incorporation were entered on the same date. About seven years later, the Homeowners Associations (COA) lodged a joint security claim against the borrower for unsettled valuations, which was later excluded. According to this appellant's appellate plea, the real estate was bought by WEG in execution, provided that the first registered mortgage was against the properties.

Thereupon, the claimant brought an action to obtain a declaratory judgement that the second mortgage of USD 38,000 was subordinated to the later registered joint charge of Pawn and Loan of COA under New York Real Property Law 399-z and was therefore cancelled by COA's enforcement proceedings. A lawsuit brought by the enforcement purchaser claimed that the "first mortgage of the record" meant the mortgage that had been written earlier, and that the bonded mortgage should be forked into its components mortgage to identify which part is the first mortgage of the track record. 3.

Purchase, 157 Misc dated 643 (Sup Ct, NY County 1993), where the courts found that the initial first mortgage took precedence over the owners' right of pledge. But the appellate tribunal found that a number of other judgments achieved the opposite outcome of Societe Generale and found that a consolidating arrangement entered before the owners' pledge was entered as the "first mortgage" under New York Real Estate Law §399-z.

Furthermore, the Court of Appeal found that at the date of consolidating the loan there was no interim pledge and the consolidating therefore did not affect WEG's prerogatives. Accordingly, the Court of Appeal decided that the contract of incorporation should be regarded as the first registered mortgage. Furthermore, the Court found that there is an unwanted political impact if preference is given to a joint pledge registered years after the date of submission of the pledge to consolidate.

Should the court determine that the consolidating arrangement is not qualified as a first mortgage, bankers and homeowners would just take extra action to meet the initial mortgage, close a new mortgage and make the extra charges necessary to obtain the same results. Court of Appeals also based its decision on the New York Convention on Condominiums, which was passed "to promote greater construction throughout the state and enable privately held companies to provide extra residential accommodation, particularly in the middle-income segment" (Mem of Joint Legis Comm on Hous and Urban Dev, 1964 McKinney's Session Laws of NY at 1840).

As the court found, the treatment of consolidating arrangements as the first mortgage gives the homeowners greater latitude in achieving a greater mortgage or funding, thereby furthering the objectives of the New York Convention. The Court of Appeal found that the contract of incorporation was the first registered mortgage on the property.