Bill proposed to limit investments by insurers

September 11, 1991|By David Conn John W. Frece of The Sun's Annapolis Bureau contributed to this article.

Concern about the growing number of financial institution insolvencies has led Maryland lawmakers to consider a bill that would limit the types of investments that can be made by insurers and credit unions in Maryland.

At a meeting yesterday morning, General Assembly leaders agreed to allow a bill to be introduced at the special legislative session Sept. 25 that would limit the degree to which the financial institutions are allowed to invest in certain mortgage securities, according to Delegate Casper R. Taylor Jr., D-Allegany, chairman of the House Economic Matters Committee. Mr. Taylor's committee held a hearing on the issue Aug. 9.

The mortgage investment bill, sponsored at the behest of the state Department of Licensing and Regulation, is the first issue the lawmakers have agreed to discuss outside of the original purpose of the special session: to vote on the controversial congressional redistricting plan.

The investment bill stems from a 1984 federal law, the Secondary Mortgage Market Enhancement Act, which Congress passed to increase the liquidity of the nation's mortgage market. The SMMEA pre-empted state restrictions on mortgage investments by broadening the definition of U.S. securities to include some secondary mortgage securities that most states allowed insurers and others to buy only in moderation.

The law helped the secondary mortgage market grow from about $4 billion in 1984 to more than $22 billion last year, and a projected $31 billion this year, according to Standard & Poor's Corp.

But the SMMEA had a seven-year window that allowed states to override the pre-emption and reinstate their own investment restrictions.

Eleven states have exercised that option, but unless Maryland and the other states act by Oct. 3, the window will close.

"We've just gone through it with real estate investments, and now 'junk' bonds," said Maryland Insurance Commissioner John A. Donaho, citing investments that have caused problems for insurance companies. This year 53 insurers have gone insolvent, according to the National Association of Insurance Commissioners.

"Secondary mortgages are not a good thing to invest in if you're a policyholder. Period," Mr. Donaho said.

But traders say the types of securities that can be purchased under the federal law are safe by definition -- they must receive the best or second best rating from a credit rating agency or they must be backed by the Federal Home Loan Mortgage Corp. (Freddie Mac) or the Federal National Mortgage Corp. (Fannie Mae), according to Bonnie Caldwell, a vice president of the Public Securities Association.

"There haven't been any defaults in the seven years since SMEA," Ms. Caldwell noted.

Further, only 2 percent of the newly permitted securities have been downgraded, according to the PSA, whose members are the banks and securities firms that trade mortgage securities.

USF&G Corp., Maryland's biggest domestic insurer, said it "believes it will have no impact on us and we are not opposing the legislation." And a Maryland Casualty Co. spokesman said his company doesn't even invest in the secondary mortgage market.

Aside from the safety issue, there are state vs. federal turf issues at stake with the proposed Maryland law.

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