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TALF is a keeper

August 6, 2009

Though policymakers have more time to mull over whether to extend TALF, it looks like the Fed will discuss it at their meeting next week in addition to Treasury purchase program that expires in September, according to the WSJ.

When the TALF program was launched in March, officials said it could extend loans of as much as $1 trillion to investors, part of an effort to revive credit markets. So far, it has only reached $30 billion.

TALF is a lifeline to the asset-backed securities market, in which consumer loans, commercial-real-estate loans and other debt are bundled into securities and sold to investors. The government provides low-cost loans with downside protection to investors who in turn use the cash to buy these securities.

Though it is small, officials believe the program has helped improve credit markets. They could decide to extend the program into 2010, beyond its current December expiration. Yields on asset-backed securities have come down substantially since the program was launched.

Also, I can’t imagine that the Fed would allow the program to expire when one of the most crucial components – the commercial mortgage-backed securities program – has barely gotten off the ground. In the initial round of financing, no one showed up to hand over new CMBS to the Fed to secure a loan namely because there hasn’t been any. When the program was extended to legacy CMBS, total loan applications didn’t even reach $1 billion and one of the securities ended up being rejected.

Under the best of conditions, it can take months to put together a CMBS deal. When it’s been dormant for more than a year, the ramp up is likely to be much longer.

This program should be a keeper for some time.

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