U.S. extends TALF lending program for commercial real estate

By Reuters Staff
August 17, 2009

By Mark Felsenthal and Al Yoon
WASHINGTON/NEW YORK, Aug 17 (Reuters) – The U.S. Federal Reserve moved on Monday to boost credit to the ailing market for commercial real estate by extending to mid-2010 an emergency lending program.

The step is seen as crucial by the industry since lending on office, retail and apartment buildings has been chilled since the onset of the credit crunch in 2007, and as the recession curbs revenue. The sector has hurt bank earnings, and is seen by Fed officials as a danger to economic recovery if borrowers with maturing loans find no other outlet than default.

The Fed said its Term Asset-Backed Securities Loan Facility (TALF) for newly issued commercial mortgage-backed securities, a program that has yet to get off the ground, will be extended to June 30, 2010 from Dec. 31

Also extended through March 31, 2010 are TALF programs credited for lowering borrowing costs on new securities backed by auto, credit card, and small business loans. The three-month extension includes TALF for existing CMBS.

“It seems to me that the Fed realizes that this program has had a positive impact on the markets and also that the markets are not yet healthy enough to walk on their own at this point,” said Scott Buchta, a strategist who follows ABS and CMBS at Guggenheim Capital Markets in Chicago.

While financial conditions have improved recently, markets for ABS backed by consumer and business loans and for CMBS are still under strain and seem likely to remain so for some time, the Fed and Treasury said in a joint statement.

Under TALF, investors apply for non-recourse loans whose proceeds are earmarked for designated securities. The Fed has lent $41 billion for ABS over six months, and $669 million for legacy CMBS in one round. There have been no new CMBS issues but Developers Diversified Realty in June told Reuters it was working on issues worth about $550 million.

Increased demand for ABS using Fed financing has pushed yields so low that that investors are increasingly buying bonds independent of the federal program.

Buying of CMBS has halved risk premiums on CMBS since March, but yields have risen in the past week as investors balked at low returns amid a deteriorating real estate picture. Renewed selling may have surprised dealers who bought CMBS in anticipation that the Treasury’s toxic asset clean-up plan would spark demand, said Chris Sullivan, chief investment officer at the United Nations Federal Credit Union in New York.

Michael Feroli, an economist at JPMorgan Chase & Co., in a research note said the extension for new issue CMBS was likely short of some expectations.

Risk premiums on an index of AAA rated CMBS rose about 0.28 percentage point on Monday to near 4 percentage points above a benchmark interest rate. The premium earlier this month dipped to near 3 percentage points, from nearly 8 points in March.

The issuance window for new issue CMBS was extended to June since those deals take more time to arrange, the Fed said. Five or six issues from real estate investment trusts are expected, said Brian Lancaster, head of mortgage and other asset-backed strategy at RBS Securities in Stamford, Connecticut.

“It’s encouraging (for CMBS) but we are not quite there,” Lancaster said.

Lenders are reluctant to refinance billions of dollars in loans made under easy terms and aggressive expectations that rents and property values would rise. But revenues are falling and prices nationally are now off 35 percent since October 2007, forcing borrowers to either put more equity in their properties or plead for extensions of current loan terms.

General Growth Properties Inc, the second largest U.S, mall-owner, in April blamed its bankruptcy on investors of its loans in CMBS.

The Fed said authorities had considered expanding TALF to other types of collateral, but decided against it for now. Investors had hoped the TALF would cover existing residential mortgage securities, but that speculation dimmed in recent weeks with those bonds seen drawing support from the Treasury’s Public-Private Investment Plan.

The Fed said officials could reconsider that decision if economic or financial conditions warrant.

“It is rather like triage,” said Jay Mueller, senior portfolio manager with Wells Capital Management in Milwaukee, Wisconsin. “Several of the markets that were in trouble are functioning much better. The Fed is putting resources where they are most needed.”
(Additional reporting by Richard Leong and John Parry; Editing by Andrea Ricci)

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