"The Fed adds CMBS to TALF
Friday, May 1, 2009
The Federal Reserve Board on Friday announced that, starting in June, commercial mortgage-backed securities (CMBS) and securities backed by insurance premium finance loans will be eligible collateral under the Term Asset-Backed Securities Loan Facility (TALF).The Fed was "talked" into extending the term-length of eligible TALF loans in order accommodate the CMBS market. The duration of commercial real estate loans are typical longer other types of loans.
The CMBS market came to a standstill in mid-2008. The inclusion of CMBS as eligible collateral for TALF loans will help prevent defaults on economically viable commercial properties, increase the capacity of current holders of maturing mortgages to make additional loans, and facilitate the sale of distressed properties. CMBS accounted for almost half of new commercial mortgage originations in 2007.
The Board also authorized TALF loans with maturities of five years. Currently, all TALF loans have maturities of three years. TALF loans with five-year maturities will be available for the June funding to finance purchases of CMBS, ABS backed by student loans, and ABS backed by loans guaranteed by the Small Business Administration.
It should be noted that by extending the term of TALF loans, the Fed's exit strategy just got a little more hazy. If inflation pressures start to turn around, which is not expected for at least a year or two out, the Fed will not be able to unwind the longer-term TALF funds. For this reason, I expect that the Fed will move a little more slowly and cautiously with the TALF prgram than it has with its other liquidity programs (like the MBS program, TAF, TSLF, etc).