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Rating Agency Proposal Draws Consumer Groups Jeers

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The Center for Economic Justice and the Consumer Federation of America are opposing an effort to change the way residential mortgage-backed securities are graded.

The American Council of Life Insurers, Washington, has asked the National Association of Insurance Commissioners, Kansas City, Mo., to have an independent firm to create a quantitative “analytical measure” of RMBS safety, and replace reliance on current rating agency RMBS ratings with reliance on the analytical measure.

The CEJ, Austin, Texas, and the CFA, Washington, have filed a joint comment calling the proposal “yet another bald attempt by life insurers to change the rules – rules the life insurers once championed – to provide capital relief to insurers at the expense of consumer protection.”

The ACLI itself has asserted that keeping the current rules will require $11 billion in additional capital contributions, the CEJ and the CFA say.

“Insurers want alternative ratings of RMBS to reduce the amount of capital required under risk-based capital rules to support these poorly-performing securities,” the groups say.

“It is inconceivable that regulators would consider capital relief for these very risky securities given projections for continued high unemployment, mortgage defaults and mortgage foreclosures,” the CEJ and CFA say.

Insurers say the rating agencies have conflicts of interest, but the company that came up with the proposed RMBS grades also would face a conflict of interest, because it would face pressure to come up with results that would give the investors it served higher reported gains, the consumer groups say.

Even if the NAIC does change the rating methodology it uses, it should change the methodology for all types of asset-backed securities, not just RMBS, the consumer groups say.

The NAIC could expand the scope of the Securities Valuation Office, an arm of the NAIC that helps state regulators assess securities, “so regulators have an institution dedicated to risk ratings of securities for the sole purpose of supporting regulatory financial surveillance of insurance companies,” the consumer groups say.

The ACLI says in response to the CEJ and CFA comment that it is submitting the RMBS proposal because the economic crisis exposed a flaw in the way RMBS have been rated for risk-based calculation purposes.

“ACLI seeks a methodology that produces the most accurate possible rating for RMBS,” the ACLI says. “Life insurers invest primarily in AAA rated bonds.”

Even when bonds start out with high ratings, “the rating agency models require a downgrade to single B or below if any loss is projected to occur at any time during the life of the security, regardless of the severity of the loss,” the ACLI says. “While some of our industry’s RMBS holdings have experienced some loss, it is not to the level reflected in the ratings agency model.”

The ACLI says the request for a change in RMBS evaluation methods is not a request for relief from capital requirements.

“In fact, under the current proposal before the NAIC, RBC charges for RMBS will be higher at the end of this year than they were at the end of 2008,” the ACLI says.


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