Relates to mortgage guaranty insurance

BILL NUMBER:S4832

Title of bill

An act to amend the insurance law, in relation to mortgage guaranty insurance

Purpose or general idea of bill

To eliminate a vestigial reinsurance requirement imposed upon mortgage guaranty insurers in situations where such insurers provide coverage on risks that exceed twenty-five percent of the entire indebtedness to an insured.

Summary of provisions

This bill would repeal the antiquated requirement that mortgage guaranty insurers restrict their coverage, net of applicable reinsurance, to twenty-five percent of the total indebtedness to an insured.

Justification

When the provision requiring mortgage guaranty insurers to cede that potion of a risk surpassing twenty-five percent of an insured's entire indebtedness was enacted, it was assumed that the result would be a shifting of the risk of the insured defaulted loan to unaffiliated reinsurers Third-party reinsurers would serve as a mechanism through which additional capital would flow to the mortgage insurance industry. Moreover, such reinsurers, with diverse risk portfolios rather than a concentration of real-estate related risks, were considered optimal for risk-spreading purposes. Finally, when the twenty-five percent requirement was adopted, coverage above that level was typically rare, and the financial burdens associated with reinsurance compliance issues were relatively innocuous

The anticipated benefits of the twenty-five percent restriction, however, were never realized, as the market for mortgage guaranty risk simply did not develop, relegating, collectively, the mortgage guaranty insurance industry as the sole repository for the excess portion of these risks. By the mid-1980s, virtually all risk in excess of twenty-five percent of the loan amount was being reinsured within the industry.

Over time, with mortgage guaranty insurers preferring to retain their own risk rather than assume those underwritten by their competitors, companies formed affiliates to reinsure their own risks. With today's demand for coverage of mortgage guaranty risks climbing into the thirty/thirty-five percent realm, most mortgage guaranty insurers now have four separately licensed underwriting entities, including a flagship company and three reinsurers to cover instances where coverage exceeds seventy-five percent of a loan. Mortgage guaranty insurers are thus required to maintain a costly, inefficient configuration of multiple affiliated entities to comply with the reinsurance requirement that, at this juncture, serves form over empty substance. Such companies are forced to establish, capitalize, license and maintain books and records and surplus for affiliates in order to comply with an antiquated and unnecessary reinsurance restriction. What was initially a well-intentioned safeguard has, in effect, engendered an elaborate, capital--draining shell game and administrative nightmare in the name of compliance absent a functional rationale for the resultant convoluted system.

Only eight states out of fifty-one jurisdictions have a comparable form of risk limitation on first-lien loans With the elimination of

the twenty-five percent reinsurance requirement, and concomitant cost redundancies, this bill would bring New York into the nation's current economic reality and give sustenance to the oft--repeated refrain that the State desires to be viewed as "open for business," by engineering a less onerous financial climate within which mortgage guaranty insurers may operate more efficiently.

Prior legislative history

None

Fiscal implications

None

Effective date

Immediate