In a joint announcement with the U.S. Treasury Department, the Fed said it would extend its Term Asset-Backed Securities Loan Facility (TALF) to June 30 for newly issued commercial mortgage-backed securities, a program that has yet to get off the ground.
The Fed and the Treasury also extended through March 31 its TALF for newly issued securities backed by auto, credit card, student and small business loans, and existing CMBS.
Analysts said the move is most important to the commercial real estate sector being buffeted by a lack of credit and as the recession curbs revenue from office, retail and apartment buildings. The industry has been often cited by Fed officials in the past month as a particular danger to a U.S. economic recovery if borrowers with maturing loans find no other outlet than default.
"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 said. TALF is largely seen as a success for lowering some consumer borrowing costs and driving some of the biggest rallies in securities markets where the money is raised.
ABS yields are now so low that that investors have begun to purchase bonds independent of the federal program. Under TALF, investors apply for non-recourse loans whose proceeds are earmarked for designated securities.
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% 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 U.S. FEDERAL), 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."
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