Insurance Quotes & Advice

The subprime collapse of 2007 devastated the bond insurance industry which in turn wreaked havoc in municipal bond markets. Federal Reserve testimony before the House Finance committee state that significant difficulties lie ahead for many segments of the municipal bond market.

The financial crisis has strained the market for municipal debt, as it has so many other markets. One source of this strain has been that losses on a range of nonmunicipal credit exposures have greatly diminished the capacity of financial guarantors to write new policies and have reduced the perceived value of previously written policies.  The share of newly issued municipal bonds that are insured has fallen from about 50 percent in the fall of 2007 to about 10 percent in the first quarter of this year, and the market for reinsurance for such bonds is largely closed. Another source of strain has been that liquidity support for VRDOs has become more expensive while support for ARS has essentially disappeared. Yet a third source of strain has been that the recession has significantly reduced the revenues collected by many municipalities, in some cases by enough to raise concerns about their ability to service their debt.

The symbiotic relationship between bond insurers and municipalities that has existed for decades may be beyond repair.  Bond insurers shot themselves in the foot when they decided to dabble in the residential mortgage market.

The fall of credit ratings for many of the big name bond insurers saw interest rates for some municipalities shoot through the roof in some cases.  At a time when the Fed has lowered interest rates to all time low, it unfortunately hasn’t translated into lower borrowing costs for many state and local governments.

The reason the relationship between insurers and municipalities worked so well for so long was because municipalities received lower borrowing costs and since they had such a low default rate, there was little or no risks to insurers, it was a win-win situation for both.  But once insurers lost their top credit ratings, this increased the financial burden for many state and local governments and in turn increased their likelihood on defaulting on their debt obligations.

It also doesn’t help matters that the length of the current recession has seen the revenue streams drop significantly for many local governments.  There have also been many cases where local governments have had to scrap planned building projects all together because cost effective funding is simply not available.

Despite political pressure to do away with the double standard credit rating system between corporate and municipal debt, it will be quite some time before the state of municipal finance recovers.