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RMBS: NAIC Does Details

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The increasing stability of the U.S. economy has changed the scenarios used in mortgage-backed securities modeling at the National Association of Insurance Commissioners (NAIC).

The Valuation of Securities Task Force at the NAIC, Kansas City, Mo., has posted responses to questions about the NAIC’s residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) review efforts on its section of the NAIC’s website.

The NAIC developed the program, which relies in part on the assistance of outside statistical Housemodeling experts, in response to complaints that traditional rating agency RMBS and CMBS ratings might not be providing all of the information needed by insurers with mortgage-backed securities (MBS) holdings and the insurers’ regulators.

The modelers have been trying to predict how insurers’ MBS holdings might perform under a wide range of conditions, and insurers, regulators and consulting firms have given the components of the models used and the scenarios fed into the models close attention.

The NAIC says it has received questions about the scenarios now used, such as the difference between the residential aggressive and residential most aggressive scenarios, and the commercial real estate baseline and upside scenarios.

“As the economy has stabilized over the last year, there is less differentiation between the upside scenarios in terms of peak to trough,” officials say in a response to the question. “The primary difference between these sets of scenarios is the pace of recovery from the trough and not in the peak to trough value.”

For the residential market, the NAIC is using home price assumptions for the end of 2012 that range from 17% below the peak level, for the most aggressive scenario, to 43% below the peak level.

The baseline assumption is that prices will be 32% below the peak level in December 2012, and that the worst peak-to-trough drop during the cycle will be

34%. The baseline peak-to-trough drop assumption has narrowed from 38% a year ago, officials note.

For the commercial real estate mark, assumptions range from 9% below the peak level in December 2015 to 46% below the peak level, with the baseline being 22% below the peak level.

NAIC officials say they are using different dates for the residential and commercial markets because the markets appear to be at different points in the cycle.

“Residential mortgages are further in the cycle and the turnaround is expected in next couple of years, while commercial property values are expected to see a similar turnaround only after several years, resulting in a different performance profile for the mortgages,” officials say.