How to Avoid Issues When a Lender Satisfies a Mortgage that was Previously Assigned

What happens when a lender satisfies a mortgage it previously assigned? It is a question that should not have to be posed, but it is a surprisingly commonplace problem. It arises most often out of New York State’s procedure for a Consolidation, Extension and Modification Agreement (CEMA), although it can easily happen any time a mortgage is assigned.

To record a mortgage in New York State (and elsewhere), the borrower must first pay mortgage recording tax. The tax can range from as little as a few cents per $100 of debt ($0.35 per $100 in Florida) to as high as a few percent (2.80 percent in New York City).

The purpose of a CEMA is to reduce the amount of taxable debt. The CEMA and its constituent documents support (and affirm to the applicable taxing authority) that the mortgage recording tax was already paid on a portion of the debt when the mortgage being refinanced was recorded and that it will now only need to pay mortgage recording tax on the new/additional money.

With the concept in mind, here is a typical scenario: A borrower decides to refinance its $500,000 mortgage and wants to increase it to $600,000. Without a CEMA, mortgage recording tax would be due on the entire amount of the debt ($600,000). Since a CEMA effectively exempts the original debt (here, $500,000) from further taxation, only the new/additional money ($100,000) would be subject to mortgage recording tax – a significant and meaningful reduction in the taxable basis.

Should the CEMA proceed with a new lender, as is often the case, this would accordingly elicit an assignment of the existing mortgage, which would then be consolidated with a $100,000 mortgage (this is the amount of the additional debt and is typically referred to as the “gap” mortgage) arriving at the full, consolidated $600,000 mortgage. What happens too often though is that the assigning lender subsequently (or sometimes simultaneously) executes and records a satisfaction of the mortgage which it assigned. This likely results from administrative procedures not quite aligned with the CEMA concept whereby a mortgage which has been paid (the assignor has been paid to assign, not satisfy, the mortgage) looks like it needs to be satisfied.

This typically goes unnoticed until there is a default under the CEMA and the foreclosure search reveals that the mortgage, which was assigned (and now forms a portion of the consolidation), has since been satisfied. Since, at least in New York, erroneous satisfactions cannot be resolved by a subsequent “corrective” instrument, this error then necessitates a quiet title action to cancel the erroneous satisfaction.

All of this is a matter of much case law, but a somewhat recent decision, Bank of New York Mellon Trust Company, N.A. v. Claypoole, 150 A.D.3d 505, 55 N.Y.S.3d 19 (1st Dept. 2017), helpfully confirms that the satisfaction is erroneous and subject to being expunged.

The controlling principle is that a satisfaction of mortgage is void from the outset when the party that executed it had already assigned away its interest under that mortgage. This is logical, but comforting nonetheless to see it enunciated by an appeals court.