The two government-sponsored housing agencies could pay a major role if several states proceed with plans to require insurance companies to comply with housing and community development lending standards.

The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation could provide credit enhancement for high-risk community investment loans.

Legislatures in Florida, Massachusetts and Illinois have introduced--but not passed--legislation that would require insurance companies to increase capital investment in low-and moderate-income communities, small businesses and family farms, according to Diana Meyer-Flanagan, director for state and policy programs with the Enterprise Foundation in Columbia, Md.

The success of the Community Reinvestment Act of 1977 appears to have prompted some limited interest in applying similar requirements to the nation's insurance industry.

The legislation has been based on an Insurance Community Reinvestment Act model developed by the Woodstock Institute of Chicago, that would:

* Establish state policy requiring insurance companies to invest in small businesses, low- and moderate-income communities and family farms;

* Require annual reports by insurance companies on the number of policies sold, dollar amounts of premiums collected, and overall investments in the state, including investments made to meet the needs of small businesses, low- and moderate-income communities and family farms;

* Empower state insurance commissioners to designate the following as authorized investments: loan funds and investments in nonprofit intermediaries undertaking reinvestment activities, securities backed by reinvestment loans and bonds issued by state agencies;

* Require state insurance commissioners to rate insurance company reinvestment performance; and,

* Provide the authority to impose fines or revoke the licenses of companies with inadequate reinvestment performances.

Some states have resisted insurer's entrance into this type of investment activity, mostly because of concern about high-risk "community reinvestments," according to Meyer-Flanagan.

"One solution is to add a layer of credit enhancement recognized by credit rating agencies that states already depend on in approving insurance company investments," she says.

"For example, secondary market securities issued by Fannie Mae and Freddie Mac are generally highly rated and permitted investments by states," Meyer-Flanagan explains.

"Fannie Mae or Freddie Mac could purchase below-market-rate rental housing loans for low-and moderate-income housing, credit enhance them if necessary, and package them into highly rated community reinvestment securities which could then be purchased by insurance companies.

Media representatives for Fannie Mae and Freddie Mac said it was premature to comment on the insurance industry developments, but Nancy Condon of Freddie Mac suggested that what Meyer-Flanagan may have in mind is something like a $100 million pilot program her company is sponsoring in Chicago.

Harris Trust & Savings Bank sold $5 million of multifamily housing loans to Local Initiatives Managed Assets Corp., a nonprofit foundation. LIMAC then exchanged the credits for Freddie Mac securities. Freddie Mac then sold the mortgages to the United Methodist Church pension fund.

The result for Harris Trust is a 20% liability from its pool share, LIMAC 16% and Freddie Mac 64%.

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