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Author Topic: Fed Extends TALF Program for Commercial Real Estate  (Read 766 times)

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Fed Extends TALF Program for Commercial Real Estate
« on: August 19, 2009, 09:00:51 AM »
Aug. 17 (Bloomberg) -- The Federal Reserve extended by three to six months an emergency program aimed at restarting credit markets, a move that may cushion the commercial real- estate industry from rising defaults and falling prices.

The Term Asset-Backed Securities Loan Facility, with a capacity of as much as $1 trillion, will expire June 30 for newly issued commercial mortgage-backed securities, instead of Dec. 31, the Fed and U.S. Treasury said today in a statement in Washington. For other asset-backed securities and CMBS sold before Jan. 1, the plan was extended three months to March 31.

Commercial property values have fallen 35 percent since peaking in October 2007, according to Moody̢۪s Investors Service. The extension may help firms such as Vornado Realty Trust, which is considering the sale of commercial MBS through the TALF. Almost $165 billion of mortgages for skyscrapers, shopping malls and hotels are due this year.

While financial-market conditions “have improved considerably in recent months,â€Â the markets for ABS and CMBS “are still impaired and seem likely to remain so for some time,â€Â the Fed and Treasury said.

The central bank said it doesn̢۪t intend to make other types of collateral eligible for the program, indicating officials rejected adding residential mortgage-backed securities after considering such a move for several months. The Fed didn̢۪t rule out a future expansion.

Door Open

Policy makers also left the door open to prolonging the program beyond the new expiration dates, saying they “will consider in the future whether unusual and exigent circumstances warrant a further extension.â€Â

While extending the TALF, the Fed is trimming or ending other emergency programs. Last week, officials decided to phase out their $300 billion of Treasury-bond purchases through the end of October. The Fed has reduced sales of Term Auction Facility loans to commercial banks by one-third and is letting a money-market lending program end in October.

In June, the Fed extended other emergency-loan programs by three months to Feb. 1.

“The Fed realizes that the markets are getting better but are not yet healthy enough to stand on their own,â€Â said Scott Buchta, a Chicago-based strategist at Guggenheim Capital Markets LLC. The June extension for new CMBS “shows that they feel that market may take a bit longer to get up and running again,â€Â Buchta said.

Restart Market

The Fed began the TALF in March to restart the market for securities backed by auto, credit-card and education loans. In June, the Fed expanded the program to cover as much as $100 billion in loans to support commercial mortgage-backed securities.

Under the plan, the Fed lends to investors to purchase new asset-backed securities as well as commercial real-estate debt.

TALF loans have helped reduce borrowing costs in some markets. The gap, or spread, on top-rated securities backed by consumer loans relative to benchmark interest rates has fallen as much as 2.15 percentage points to 0.60 percentage point since the TALF started in March, JPMorgan Chase & Co. data show.

Since March, the spread on AAA debt backed by commercial real estate has plunged 7.2 percentage points to 4.6 percentage points more than U.S. Treasuries, according to Barclays Capital.

Citigroup Inc., Ford Motor Co. and JPMorgan Chase are among companies that have sold auto and credit-card debt through the TALF. Brookfield Properties Corp. is “thinking aboutâ€Â using the emergency program, Chief Executive Officer Richard Clark said July 29.

Shield From Losses

As of Aug. 12, the Fed̢۪s loans under the program totaled $29.6 billion. The central bank gave the TALF an initial capacity of $200 billion, backed by $20 billion of funds from the Treasury̢۪s Troubled Asset Relief Program to shield the Fed from losses. In February, the Fed and Treasury said the TALF could grow to as much as $1 trillion.

The commercial real-estate industry had asked for an extension of the TALF deadline, saying the program needed more time to get going. The lag time of three to four months to package loans into mortgage-backed securities means that September or October would be the effective end date if the TALF expired in December, according to Jeffrey DeBoer, president of the Real Estate Roundtable, a Washington-based trade group.

Also, 41 House members -- including Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, and Carolyn Maloney, a New York Democrat who heads the Joint Economic Committee -- signed a July 31 letter to Bernanke seeking a one-year extension through December 2010 and asking for a decision by mid-August.

‘Reasonable Chance’

TALF loans for older CMBS have a “reasonable chanceâ€Â of being extended past March, said Aaron Bryson, an analyst at Barclays Capital in New York.

New York Fed President William Dudley said in June that “there’s a huge administrative hurdleâ€Â to expanding TALF to cover residential MBS because each security is different and must be separately evaluated for the size of the haircut that should be applied. The haircut is how much capital investors put up for the Fed loan.

Separately, the Fed is buying as much as $1.25 trillion of residential MBS this year to lower interest rates in housing.



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