The Office of General Counsel issued the following informal opinion on May 15, 2001, representing the position of the New York State Insurance Department.
RE: Mortgage Guaranty Insurance
1. In determining whether or not a mortgagor is required to pay the cost of continuing mortgage guaranty insurance ("PMI"), what is the proper standard for determining the loan-to-value ratio where there was no appraisal of the value of the property at the time the mortgage was made?
2. May an insurer issue a policy of mortgage guaranty insurance pursuant to § 6503 of the New York Insurance Law where the loan is being made on property that is not going to be occupied by the owner-borrower?
1. Under the New York Insurance Law § 6503(d) (McKinney Supp. 2001), the loan-to-value ratio is determined by using the appraised value of the property at the time the loan is made. If no appraisal of the property value was made at the time the initial loan was made, a present appraisal could be made based on the value of the property at the time the mortgage was made.
2. Article 65 of the New York Insurance Law allows mortgage guaranty insurance to be issued on any "Authorized real estate security", as defined therein. N.Y. Ins. Law § 6501 (McKinney Supp. 2000) defines that term to include " an amortized instrument of indebtedness evidencing a loan secured by a first lien on real estate ." There is no requirement that the property be owner occupied.
N.Y. Ins. Law § 6503(a)(1) (McKinney Supp. 2001) provides that mortgage guaranty insurance ("PMI") may be written to insure loans secured by "authorized real estate securities". The term "authorized real estate security" is defined by N.Y. Ins. Law § 6501(c)(1) (McKinney Supp. 2001), which provides, in pertinent part, as follows:
(c) "Authorized real estate security" means: (1) an amortized instrument of indebtedness evidencing a loan secured by a first lien on real estate which at the time the loan is made is not less than eighty percent but not more than one hundred percent of the fair market value of the real estate
Thus, PMI can only be required on a mortgage loan where the loan-to-value ratio is between eighty (80%) and one hundred (100%) of the fair market value of the property. The term "fair market value" is not expressly defined in the Insurance Law. However, the Department interprets "fair market value" in this context as meaning appraised value and not sales price. The rationale for this interpretation is that the appraised value reflects the price that a willing buyer and willing seller, operating at arms length, would agree upon. The actual sales price, by contrast, may be higher or lower due to the particular constraints to which either of the parties to the transaction may have been subject, and as such the actual sales price may deviate significantly from the appraised value. Thus, actual sales price is not as consistent an indicator of fair market value as appraised value. Therefore, in determining whether a lender may require PMI, the loan-to-value ratio should be calculated by reference to the appraised value.
A question was raised regarding the situation in which a mortgage loan was made without a contemporaneous appraisal of the propertys value. The inquiry made was whether it was possible to use an alternative measure of the propertys value, such as the actual purchase price, or an appraisal of the value of the property as of the time that the LTV ratio is being calculated. New York law makes no provision for the use of a measure of value other than an appraisal of the value of the property at the time the loan is made. One solution to the problem posed would be to obtain a retrospective appraisal of the fair market value of the property at the time the purchase and sale took place and the loan was made.
The enactment of the Homeowners Protection Act of 1998 ("the HPA"), 12 U.S.C.A. § 4901 et seq. (West Supp. 2000), supersedes the New York Insurance Law (or any relevant state statute) to the extent that the state statute is "inconsistent" with the federal law. The HPA, in calculating the LTV ratio for purposes of determining whether PMI must continue to be paid for by the borrower, uses the lesser of the sales price of the property securing the mortgage, as reflected in the contract, or the appraised value at the time at which the subject residential mortgage transaction was entered. See 12 U.S.C.A. § 4901(10) (West Supp. 2000). However, the HPA is applicable only to residential mortgages and residential mortgage transactions, which are defined therein as follows:
(12) Residential mortgage -- The term "residential mortgage" means a mortgage, loan, or other evidence of a security interest created with respect to a single-family dwelling that is the primary residence of the mortgagor.
(13) Residential mortgage transaction -- The term "residential mortgage transaction" means a transaction consummated on or after the date that is 1 year after the date of enactment of this chapter, in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against a single-family dwelling that is the primary residence of the mortgagor to finance the acquisition, initial construction, or refinancing of that dwelling.
12 U.S.C.A. § 4901(12) & (13) (West Supp. 2000)(Emphasis added).
In the circumstance where a mortgage loan is made and the owner-borrower will not be occupying the mortgaged property, the HPA will not be applicable and New York state law will apply. N.Y. Ins. Law § 6503(a)(1) (McKinney Supp. 2001) provides that PMI may be written to insure loans secured by "authorized real estate securities". The term "authorized real estate security" is defined by N.Y. Ins. Law § 6501(c) (McKinney Supp. 2001). Unlike the HPA, there is no requirement or limitation that would prevent an insurer from writing PMI on a mortgage transaction where the owner-borrower will not be occupying the subject property.
With regard to non-owner occupied property, New York Law is not superseded by the HPA, which applies only to residential mortgages and residential mortgage transactions as defined therein.
Under the provisions of the New York Insurance Law, the LTV ratio property value calculation must be based upon the appraised value at the time the mortgage was made. If no such appraisal was made at that time, a retrospective appraisal may suffice.
The provisions of Article 65 of the New York Insurance Law are applicable to mortgages granted on non-owner occupied real estate, assuming the other provisions of the article are satisfied.
Lastly, Article 65 of the New York Insurance Law makes certain exceptions to the stated LTV ratio requirements for loans issued by the State of New York mortgage agency: those exceptions are not applicable to Freddie Mac loans.
For further information you may contact Associate Attorney Sam Wachtel.