The Office of General Counsel issued the following opinion on October 24, 2005 representing the position of the New York State Insurance Department.
Re: Mortgage Guaranty Insurance - Determination of Fair Market Value
1) Under New York law, may a lender use the subject property's sales price and not the appraised value at the time of sale for purposes of determining whether to require a borrower to purchase mortgage guaranty insurance ("PMI")?
2) Does the same rule apply for purposes of determining the requirement of PMI at the inception of the loan and the termination of PMI during the course of the loan?
3) Do the New York requirements apply irrespective of the fact that a lender's own guidelines may normally require PMI on a given loan?
1) Under New York Law, a lender must use the subject property's appraised value at the time of sale for purposes of determining whether to require a borrower to purchase mortgage guaranty insurance ("PMI").
2) Yes, the same rule applies for purposes of determining the requirement of PMI at the inception of the loan and the termination of PMI during the course of the loan.
3) Yes, the New York requirements apply irrespective of the fact that a lenders own guidelines may normally require PMI on a given loan.
An employee of a loan and portfolio consulting company made a general inquiry regarding New Yorks rules governing borrower paid mortgage guaranty insurance ("PMI").
N.Y. Ins. Law § 6503(a)(1) (McKinney Supp. 2000) 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. 2000), 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
Under this statute, PMI may only be required on a mortgage loan where the loan-to-value ratio value 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.1 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.
I note further that the Department makes no distinction between the making of the determination that PMI is appropriate at the inception of the loan or for determining the point at which PMI should be terminated during the course of the loan. The standard is the same for both situations.
Finally, a lenders own underwriting criteria are irrelevant to the application of the New York law. A lender's opinion that it would be prudent to obtain PMI on a given loan does not supersede the New York rule.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City office.
1See O.G.C. Opinion (August 11, 2000); O.G.C. Opinion No. 01-05-16 (May 15, 2001); O.G.C. Opinion No. 01-02-02 (February 2, 2001); and O.G.C. Opinion No. 02-01-09 (January 9, 2002).