Senate Bill S4832

                                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