On August 30, 2013, the New York Department of Financial Services (DFS) issued a second order extending the time period for excluding revised mortgage insurance premiums from subprime loan calculations. A temporary order was initially issued on July 3, 2013, and was set to expire on September 2, 2013.
Earlier this year, the Federal Housing Administration (FHA) revised its policies concerning mortgage insurance premium (MIP), as described in Mortgagee Letter 2013-04. Effective June 3, 2013, some borrowers are required to pay MIP over the life of the loan.
Section 6-m of the New York Banking Law, which deals with subprime home loans, sets a formula to determine the Annual Percentage Rate (APR) threshold for subprime loans. The current criteria include MIP in the APR calculation, including the additional FHA life-of-loan premiums in effect as of June 3, 2013.
The new FHA life-of-loan MIP, together with increasing interest rates, has caused a disproportionate number of New York loans to be categorized as subprime. As a result of the restrictions on subprime loans under Section 6-m and the increased scrutiny that subprime lenders are facing from the state regulators and plaintiff class action lawyers, lenders are reluctant to close subprime loans, limiting the availability of mortgage credit in New York.
The DFS acknowledged this problem, and on July 3, 2013, issued a temporary order instructing lenders to leave revised MIP, as effectuated by Mortgagee Letter 2013-04, out of the calculations under Section 6-m. The temporary order was initially effective for 60 days and would have expired on September 2, 2013. Rather than allow the order to expire, the DFS enacted a temporary order on August 30, 2013, extending the time period to exclude MIP from subprime loan calculations until September 30, 2013.
It is unclear what steps the DFS plans to take after the extension expires at the end of September. Unless there is a long-term resolution to this issue, mortgage lending in New York will likely constrict when the temporary order expires.