TALF Expands to Include Legacy CMBS

As of July, certain high-quality commercial mortgage-backed securities (CMBS) issued before January 1, 2009 will be eligible collateral under the Term Asset-Backed Securities Loan Facility (TALF), the Federal Reserve Board said today. The TALF program is aimed at stimulating lending by allowing private investors to purchase securities with a matching government investment. The Fed in early May announced that CMBS and securities backed by insurance premium finance loans as of June will be eligible collateral for TALF participation, but today’s announcement marks the first addition of a legacy asset class to the list of eligible TALF collateral. The extension of eligibility to include legacy CMBS is intended to promote price discovery and liquidity for legacy CMBS, the Fed says. The resulting improvement in legacy CMBS markets should facilitate the issuance of newly issued CMBS, and in turn, help borrowers finance new purchases of commercial properties or refinance existing commercial mortgages on better terms. To be eligible as collateral for TALF loans, legacy CMBS must be senior in payment priority to all other interests in the underlying pool of commercial mortgages, among other requirements. The Federal Reserve Bank of New York will hold the power to review and reject as collateral any CMBS that does not meet the required terms or poses some unacceptable risk. All eligible CMBS must have at least two triple-A ratings from DBRS, Fitch Ratings, Moody’s Investors Service, Realpoint or Standard Poor’s and must not have a rating below triple-A from any of these rating agencies. The Federal Reserve is in the process of determining a standardized procedure for determining the set of rating agencies whose ratings will be accepted for various types of eligible collateral. In a separate report today, the Wall Street Journal conducted an analysis that found commercial real estate loans could generate losses of $100bn by year-end 2010 if the economy worsens. Such loans could potentially account for almost half the losses at the 900 small and mid-sized banks analyzed by the WSJ. Write to Kelly Curran.