BLOG VIEW: In TALF We Trust?

r this month, the Federal Reserve Board announced that beginning in June, commercial mortgage-backed securities (CMBS) not only will be eligible collateral under the Term Asset-Backed Securities Loan Facility (TALF), but will also enjoy extended terms. Under the revised plan, up to $100 billion of TALF loans will be given five-year maturities, subject to ongoing evaluation by the Fed. Five-year terms are, of course, more compatible with CMBS than the old three-year terms and are expected to help attract demand from investors. In theory, this sounds like the CMBS panacea we've been awaiting for over a year. As the Fed noted in its announcement, ‘The inclusion of CMBS as eligible collateral for TALF loans will help prevent defaults on economically viable commercial properties, increase the capacity of current holders on maturing mortgages to make additional loans, and facilitate the sale of distressed properties.’ Commercial Mortgage Securities Association (CMSA), which says it has been talking TALF with policy-makers since late last year, was quick to applaud the Fed's latest action. ‘Extending TALF to CMBS with five-year terms is critical to providing liquidity and facilitating lending in the commercial mortgage market,’ Christopher Hoeffel, CMSA president, stated. Similarly, the Mortgage Bankers Association (MBA) endorsed the new and improved TALF – particularly the option for participants to opt for either a three-year program length or five-year program length. At the same time, both the MBA and CMSA also pointed to a glaring shortcoming in the existing program: Only CMBS issued after Jan. 1, 2009, will be eligible for the TALF. Needless to say, the current CMBS class of 2009 comprises a tiny group of securities in comparison to large, lurking pools of CMBS from prior years that now pose a major delinquency threat. Shouldn't legacy CMBS rank as a much higher concern than recent-issue CMBS? Can the market even begin to repair itself before something is done with old CMBS? Both CMSA and the MBA say that they plan to continue pressing policy-makers to extend TALF eligibility to legacy loans. As for the potential of the current TALF program, some industry executives foresee a less positive effect than the rosy outcome predicted by the Fed. Simply stated, ‘Commercial Mortgage Bond Revival Will Be Slow, Even With TALF,’ a recent headline in the Wall Street Journal warned. As the article notes, the CMBS market has been essentially closed for over a year, unlike the consumer-loan asset-backed securities market, which took a full three months to revive itself. Thus, CMBS will likely take much longer to restart – that is, if TALF proves to be sufficiently attractive to investors. Terms are popularly viewed as ‘less compelling than for the existing new issue consumer-backed securities program,’ Deutsche Bank's Richard Parkus told the WSJ. To generate an acceptable return, ‘The minimum coupon at which commercial mortgage loans would have to be originated is sufficiently high that, in our view, there would be limited appetite on the part of borrowers,’ he said. The first TALF deals involving CMBS are expected to hit the market within the next couple of months. How will the market respond? Will TALF be of any help to the commercial mortgage lending market? What do you think? [b]- Jessica Lillian[/b], [i]Commercial Mortgage Insight[

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