Fed steps in to support CMBS market

The Talf programme was originally designed to restart the securitisation industry by offering investors cheap loans to buy AAA rated asset-backed securities (ABS). To encourage banks to start issuing new ABSs, the programme would lend only against newly issued securities - but on March 23, the Fed announced it would also lend against AAA rated 'legacy' securities, as part of the Public-Private Investment Program, intended to free banks of their billions of dollars of holdings of toxic ABSs.

"The resulting improvement in legacy CMBS markets should facilitate the issuance of newly issued CMBS, thereby helping borrowers finance new purchases of commercial properties or refinance existing commercial mortgages on better terms," the Fed said yesterday. Treasury secretary Tim Geithner added, in testimony today before the Senate Banking Committee: "Addressing the dislocation in the commercial real estate market through this programme is critical to restoring the flow of credit to owners of commercial real estate and preventing a damaging chain of events in this market."

The loans, which can be either three or five years in duration, will bear interest consisting of the relevant Libor rate plus 100 basis points. To protect the public interest, investors will be subject to a 15% haircut - meaning that to get funding to buy CMBSs, they will receive 85% of the total loan amount and pledge 15% as collateral. If the average life of the CMBS is greater than five years, the haircut will increase by one percentage point per year.

The New York Federal Reserve Bank, which will administer the loans, has not yet decided whether to allocate loans by auction or by other means, it said, adding that it might also require that the loans be used "to fund recent secondary market transactions between unaffiliated parties that are executed on an arm's length basis".

Though commercial mortgages are performing slightly better than residential mortgages, both are seeing rocketing delinquency rates. Commercial delinquencies rose to 6.4% in the first quarter of this year, and show no sign of slowing. And demand for commercial property has dropped by record amounts, according to research by the Center for Real Estate at the Massachusetts Institute of Technology (MIT).

David Geltner, director of research at the Centre, commented: "Sales volume is down almost to nothing, as reflected in our demand index, which indicates the prices buyers are willing to pay fell a record 12% in the first quarter and is now 28% below a year ago and 39% below its mid-2007 peak... This type of disconnect between the supply and demand sides of the market, with demand-side sentiment plunging and property owners refusing to sell into such losses, is greater than we have ever seen before, and is very nearly removing every bit of liquidity from the market."

See also: The big clean-up
Talf requests plunge $3bn to $1.7bn in latest funding round
Questions raised over US scheme to buy toxic assets
Time for Talf
Fed opens $800 billion war chest to aid securitisation recovery

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