Government Extends TALF Debt-Securities Purchasing Program

The Federal Reserve Board and the Treasury Department on Monday announced that they approved an extension to the Term Asset-Backed Securities Loan Facility (TALF). But the extension did not go as far as some had hoped, either in terms of adding additional types of covered securities to the program or extending the program to the end of 2010.

“Conditions in financial markets have improved considerably in recent months.  Nonetheless, the markets for asset-backed securities (ABS) backed by consumer and business loans and for commercial mortgage-backed securities (CMBS) are still impaired and seem likely to remain so for some time,” the Federal Reserve and the Treasury said in its official announcement. “To promote the flow of credit to businesses and households and to facilitate the financing of commercial properties, the Federal Reserve and Treasury approved extending TALF loans against newly issued ABS and legacy CMBS through March 31, 2010.”

The Fed said it would continue to monitor financial conditions and will consider in the future whether circumstances warrant a further extension of the TALF to help promote financial stability and economic growth.  The Federal Reserve and Treasury had previously authorized TALF loans through December 31, 2009.

The TALF is designed to increase credit availability and support economic activity, in part, by facilitating renewed issuance of consumer and business asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS).  The Fed authorized the TALF on Nov. 24, 2008, under section 13(3) of the Federal Reserve Act. Under the TALF, the Federal Reserve Bank of New York has extended loans secured by triple-A-rated newly issued ABS backed by certain consumer and business loans and leases.

The securities already eligible for collateralizing TALF loans include the major types of newly issued, triple-A-rated ABS backed by loans to consumers and businesses, and newly issued and legacy triple-A-rated CMBS.

The CMBS program started in July for certain high-quality commercial mortgage-backed securities issued before January 1, 2009 (legacy CMBS) will become eligible collateral under TALF.

On May 1, the Fed announced it would expand the range of acceptable TALF collateral to include newly issued CMBS starting with the June subscription.

“The Federal Reserve and Treasury are prepared to reconsider their decision if financial or economic developments indicate that providing TALF financing for investors’ acquisitions of additional types of securities is warranted,” the joint statement said.

“I think it is good that they have and end date, but a year is not an enormous amount of time,” said John Jay, senior analyst at Aite Group. “This gives everyone a little more time. It allows some liquidity for the securities market.”

The credit markets, especially credit cards, continue to need the help, Jay said, pointing to the recently reported poor financial performance of the American Express portfolio, considered to be among the least risky of the credit card issuers.

Jay added that commercial real estate, which TALF also backs, continues to be extremely weak, even though it has not suffered the precipitous drop that some analysts have been predicting since the beginning of the year.

“Much of that is already priced in,” Jay said. However, he cautioned that there could be additional problems with commercial real estate if loan holders can’t refinance when the notes come due.