Under the first of two plans announced yesterday morning, the Fed will establish a Term Asset-Backed Securities Loan Facility (Talf) which will see the Federal Reserve Bank of New York lend up to $200 billion in non-recourse financing to holders of new or recently originated AAA rated ABSs backed by student loans, auto loans, small business loans and credit card loans.
The Treasury will provide $20 billion in credit protection to the New York Fed to back the Talf, reducing the amount left unspent in the initial $250 billion allotment from the Troubled Assets Relief Programme (Tarp) to just $40 billion.
The Talf aims to reinvigorate the ABS market, which experienced a precipitous decline of new issuance in September followed by the complete constriction of the market in October.
In lending up to $200 billion to institutions holding ABS, the Fed hopes fresh monies will be passed down to households and small businesses through a resumption of active trading in highly rated ABS products, freeing up auto loan, student loan and other lenders to extend fresh credit to consumers.
In the other major announcement, the US central bank will begin purchasing MBSs backed by government-sponsored entities Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks.
The purchases will be conducted in partnership with primary dealers through a series of auctions, the first of which - worth up to $100 billion - will commence next week. Further purchases potentially worth up to $500 billion will be made "by asset managers selected via a competitive process", although no further details were immediately supplied by the Fed.
It is unclear whether any federal relief will be proposed for private label residential MBSs or if either scheme will include measures to resurrect plans to purchase MBSs referencing subprime mortgages. The latter goal was originally the central element of the Tarp but was shelved last week, with the authorities now using the funds to purchase equity stakes in financial institutions.
"We're not particularly surprised that no explicit reference was made to plans to directly purchase private label residential MBS, but the Talf announcement specifically mentioned commercial mortgage-backed securities and non-agency residential-mortgage backed securities as potential assets that could be included under an extended Talf scheme. We would be supportive of any move to expand the facility to include those assets," said Steve O'Connor, senior vice-president for government affairs at the Mortgage Bankers Association in Washington, DC.
Immediate analyst reaction to the proposals was generally positive. Barclays Capital researchers Ashish Shah, Joe Astorina, Priya Misra and Kurush Mistry stated in a research note that they saw both programmes as "huge positives for the market, representing a route to get consumer and mortgage lending restarted again by kick-starting the securitisation process".
While noting $500 billion is "more than enough to drain 12 months' net supply" from the agency MBS market, the Barclays team noted that only $200 billion has been proposed for ABS relief under the Talf, although there is $811.6 billion of 2005-2008 vintage auto, credit card, student and small business loans ABS outstanding in the market.
Other analysts similarly praised the intent of the plans but warned about the longer-term ramifications of extending federal lending and expenditure on such a massive scale.
"The Talf programme should help to reduce the costs of consumer financing as AAA tranche spreads should tighten significantly on the back of access to potentially lower-cost Fed financing," wrote Bank of America credit analyst Jeffrey Rosenberg in a client note.
"However, a critical limitation on all these reflationary activities is their long-term impact on inflation and the dollar. Today's dollar decline and gold's rise immediately following the announcement should serve as a warning sign as to the required temporary nature of these programmes to avoid turning a credit crisis into a currency crisis," he added.
The week on Risk.net, November 17–24, 2017Receive this by email