Loss Mitigation – Can A Mortgage Modification Agreement Incur Mortgage Tax?

While generally the answer to the question is “no”, if past due interest is capitalized, the answer becomes “yes” – a meaningful concept.

Especially in difficult times of mortgage default – such as the era of the subprime crisis – settling mortgage foreclosure actions becomes an even more compelling need.  And with further distress, the path of settlement can more often become the mortgage modification agreement.  Just because a mortgage is modified does not mean, however, that it invokes the payment of any mortgage tax in New York.  But, because a mortgage tax must be paid on any additional sums which a mortgage secures, a mortgage modification agreement which in some fashion advances additional monies can elicit the payment of a mortgage tax.  In turn, the lender or servicer must take into account that charge – to be paid either by the borrower (hopefully) or by the lender/servicer if it so chooses.

What can be common in mortgage modification agreements is adding all past due interest (perhaps with other delinguent items), on to the sum due, then running interest on the aggregate of the principal balance and the accumulated interest.

It is that interest in arrears which is deemed by New York State to be an addition to principal upon which a mortgage tax must be paid.  [This is pursuant to State of New York, Commission of Taxation and Finance Advisory opinion TSB-A-91(5) R, citing Matter of Cosmopolitan Broadcasting Corporation, Dec St Tx Comm, September 28, 1979, TSB-H-79(22) M and Matter of Dubroff Associates, Inc., et. al., Dec St Tx Comm, December 18, 1976; see also Tax Law §§255.1(a) and 258]

Where more money will be due pursuant to the mortgage modification agreement, then the lender or servicer will wish to record that agreement so any subsequent encumbrancers will be junior to that mortgage as modified.  But that agreement cannot be recorded (and cannot be enforced in a foreclosure) unless the mortgage tax will have been paid if it was due.  As noted, where interest has been capitalized, the mortgage tax would be due and so this otherwise obscure concept becomes very meaningful in the foreclosure settlement process.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.