Fed opens aid plan to legacy commercial property

The U.S. Federal Reserve on Tuesday further widened its safety net for downtrodden credit markets by making older commercial property loans eligible for an emergency program.

The Fed said its $200 billion Term-Asset Backed Securities Loan Facility, which it has said may grow to $1 trillion, will be opened to AAA-rated legacy commercial mortgage-backed securities that were issued before Jan. 1.

The Fed said in March it would open the door to legacy, or older, securities -- as opposed to newly issued ones, for TALF loans, and this is the first legacy asset class to gain the go-ahead.

The commercial mortgage-backed security market, which has financed approximately 20 percent of commercial mortgages, "came to a standstill in mid-2008," the Fed said in a statement.

Extending the loan facility to older commercial mortgage backed securities should spur issuance of newer securities and help borrowers finance new purchases of commercial properties or refinance on better terms, the Fed said.

The lending facility is part of a series of unusually bold moves the U.S. central bank has taken since late 2007 to restore growth and lending in an economy decimated by the dramatic collapse of housing markets and a surge in mortgage defaults [N19437787].

While historic declines in home values and home building are at the heart of the crisis, commercial real estate markets have suffered collateral damage as businesses have sharply reined in investment during the downturn. Commercial real estate prices are off more than 20 percent from a year ago.

Risk premiums on commercial mortgage-backed securities dropped after the announcement, according to Trepp, a bond data provider that tracks commercial mortgage backed securities.

Loans secured by CMBS will have three- or five-year maturities.

The Fed and the Treasury Department launched the facility in November to breathe life into asset-backed securities markets for auto, credit card, small business and some other loans in the worst financial crisis in decades. The Fed broadened the facility on May 1 to include newly issued commercial property loans.

The Fed took a further new step of allowing DBRS and Realpoint to rate newly issued and legacy CMBS for eligibility for the program in addition to Fitch Ratings, Moody's Investors Service and Standard & Poor's. The U.S. central bank has been under pressure to open the task to other ratings agencies besides Fitch, Moody's and S&P, who critics say failed to warn investors and analysts of looming damage from weak credits and should not be rewarded with business through the government program.

Response to the TALF program was below expectations in the first two months of activity, in part because issuers of asset-backed securities were reluctant to participate in a government initiative.

However, Fed Chairman Ben Bernanke said in a May 12 letter to a member of Congress that he expects that demand for TALF loans in June will exceed the $10.9 billion that was requested at the May funding. Investors are more comfortable with the program and conditions in the asset-backed securities markets have improved, he said.

source: reuters


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