A concern being voiced over pending regulatory limits on insurer investments is a potential negative impact on industry participation in the secondary mortgage market.

While most of the people following the project of the National Association of Insurance Commissioners haven't got that far on the working draft yet, there are indications that changes will be made that will alleviate concerns that the insurance industry will be driven from the secondary market.

"This is just the first draft, which I think makes a lot of speculation premature," said one regulator following the project. "However, I know there is at least one error in the draft that relates to the secondary mortgage market under the Secondary Mortgage Market Enhancement Act. I think there will be some change here."

There should be a note in the draft that states that SMMEA overrides all sections of the draft that relate to secondary market investments, according to the regulator.

For states that haven't overridden SMMEA. the note would mean the related sections of the draft wouldn't apply and would therefore have no effect on the secondary mortgage market obligations.

As with so many regulatory proposals, the impact of this draft on the insurance industry as a whole is hard to gauge, especially in such a tentative stage. The effect will partly revolve around what kind of mortgage companies get involved. "Those that are resold individually will come under the limits of the loan-to-value formula, while those that are securitized and bundled won't," said American Council of Life Insurance spokesman Gene Grabowski.

"What it will restrict is certain specific types of collateralized mortgage obligation tranches, such as the interest-only type," the regulator said. "Whether the restriction will affect any participating insurance company is something I can't answer. but it certainly wouldn't be wise for any company to have sizable investments in interest-only tranches without anything else or anything to offset it."

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