NAIC Votes To Develop Its Own RMBS Tools

The National Association of Insurance Commissioners voted to develop its own residential mortgage backed securities tools rather than rely on ratings from ratings agencies in determining company risk-based capital requirements for 2009.

In order for regulators to implement a new model that would assess RMBS, the process must be developed in the six weeks before year-end. As described on a conference call this afternoon, a vendor and a consultant to oversee the project and help develop assumptions for the NAIC model will have to be retained. The cost this model will be paid for by the insurers that use it, according to the discussion.

Virginia regulator Doug Stolte said that the NAIC, Kansas City, Mo., has had concerns about the rating agencies’ ratings of these instruments for the past few years. The ratings do not consider the amount of loss that is expected but rather the probability of loss, he explained.

This is a short-term proposal, according to Mike Moriarity, a New York regulator. The model the NAIC is advancing would look at expected losses and incorporate those results into the RBC formula for capital charges, he added. So, if a company purchased RMBS at a discount or the company’s portfolio was written down, those events would be considered for RBC, Moriarity explained.

South Carolina Director Scott Richardson wanted to know if what regulators were voting on was less stringent that what is currently used to determine RBC for residential mortgage-backed securities. Wisconsin Commissioner Sean Dilweg responded that it is not necessarily the case, and that what it would do would be to provide a more exact accounting of the securities.

It was noted that rating agencies declared that the securities were four times more risky than in 2008. “So, either they were wrong last year or this year,” Dilweg said. It was also noted by Roger Sevigny, NAIC president and New Hampshire commissioner, that last year, rating agency ratings of municipal bonds wrapped by guarantees were decoupled from RBC calculations.

Utah Commissioner Kent Michie said that he was “skeptical” that contractors could turn around the project in such a short time.
New York’s Moriarity explained that said that regulators have the prerogative to use rating agencies in RBC calculations or to change to another model if ratings are not working.

It was noted that RBC for the life industry is roughly $120 billion and there is $11 billion in RBC for RMBS if ratings are used, approximately 10% of total RBC. South Carolina’s Richardson then asked if the difference was small whether it would matter if regulators took another year to develop the model.

Richardson then alleged that Wall Street had wrapped high quality mortgages with junk mortgages for the purposes of hiding the junk. Utah’s Michie said that regulators could not be certain of that for a fact.

Louisiana’s Commissioner Jim Donelon also wanted to know “What’s the rush?” He noted that the NAIC was hoping to accomplish this plan in less than 60 day. And, he asked why there was the need to do it so quickly and how much was in the budget to achieve this end.
Concern was raised that “we will really be severely criticized for doing this on such a rushed basis on such toxic assets that consumer groups have opposed and companies are in favor of.”

The discussion ended in a vote by the NAIC’s executive committee in which there were two “no” votes, Louisiana and South Dakota, and was followed by a vote by its plenary, or full body, in which there were four “no” votes. “No” votes at the Plenary level included Georgia, Louisiana, Montana and South Dakota.

The vote was preceded by a request from the Center for Economic Justice, Austin, Texas, not to adopt the plan. In a letter from Birny Birnbaum, executive director, he urged commissioners to reject the plan because “the proposal picks one class of securities – at the urging of industry – for capital relief while ignoring other types of securities which, utilizing the same alternative methodology, may require more capital. The end result will be less capital protecting consumers than under current rules.

Birnbaum also notes that the proposal is being “rushed through the NAIC without the necessary transparency.” And, Birnbaum continues, there is no reason to do so. Birnbaum asserts that the additional $9 billion in capital insurers would be required to pony up if rating agency ratings continue to be used as criteria in RBC calculations “is not a crisis requiring the rushed action before the NAIC today.”
RMBS show are very risky because mortgage delinquencies and defaults show no signs of abating, according to Birnbaum. Consequently, capital requirements should not be diminished, he maintained.