This morning, the Federal Reserve announced that it would extend its Term Asset-Backed Securities Loan Facility (TALF) through March 31, 2010. TALF exists as a way for banks and other issuers to obtain loans backed by a variety of assets including consumer loans, business loans and commercial mortgages (CMBS). Previously, the program was to last until year's end. The Fed essentially added on a quarter. I think TALF is an important program, but wonder if it's wise to continue to extend it.
So why is TALF good? Because it works. It has allowed banks to secure billions in funding and has helped alleviate the credit crunch. I was just at a barbecue last weekend in New York and spoke to a friend of mine who works as an investment banker in asset-backed securities (ABS). I asked him how he felt the market was doing, and he said that TALF was still the only game in town for most assets. Although some ultra-prime asset-backed securities transactions are getting done, investors are still wary of anything without totally pristine collateral. The Fed isn't.
Yet, does it make sense to extend the program into next year? It does if the asset-backed securities market remains frozen. I wonder, however, if the market would ultimately be better off if banks are forced to get investors interested in asset-backed securities sooner than later. As long as the banks have the option of going to the Fed, they don't really need to bother trying to get investors back into the market for these securities. As a result, it could be argued that TALF is actually one of the reasons that the market remains closed.
What will it take for the ABS market to open back up? Banks and issuers would have to stomach paying very high interest rates on these securities at first. Through time, however, investors will become more comfortable with these bonds again, brining those rates back down to more reasonable levels. Some might argue that TALF will allow banks to reenter the market at lower cost next year, but I think the premium demanded by investors will be high at first no matter when the gears start moving again.
In its release, the Fed also mentioned that it does not "anticipate" expanding the collateral types eligible for TALF. Currently residential mortgage-backed securities are not eligible. The Fed's statement makes clear it has no plans to change that precedent. That leaves the government-sponsored entities like Fannie Mae and Freddie Mac with the responsibility for propping up the residential mortgage market. Commercial mortgages, old and new, are eligible, however. As I mentioned last week, that might be something to worry about.