EDITOR’S NOTE: Prognosis for TALF: Not Good?

By Keat Foong, Executive EditorThe Term Asset-Backed Securities Loan Facility (TALF) was extended by the Obama Administration in February to provide government financing to private investors for the purchase of CMBS in addition to other types of asset-backed securities. At this point, signs that TALF would have a positive effect in reviving the conduits market may not be good. According to Sam Chandan, president and chief economist of Real Estate Economics LLC, in his Monday report of April 13, the results of the second round of funding from the government “raise serious questions about the viability of the TALF program in its current form.”The problem may be that private investors are not stepping up to the plate to obtain the financing, administered by the Federal Reserve Bank of New York. In the second round of funding in April, “loan requests totaled just $1.7 billion, down 64 percent from the first round’s already meager $4.7 billion,” writes Chandan. These first two rounds of fundings are for the purchase of the other types of asset-backed securities initially covered by TALF. In the first round of TALF funding, for example, private investors requested loans for auto- and credit card-backed securities, though none for student loan- or small business-backed securities. The Federal Reserve Bank of New York has characterized the first round of loan requests as “a good start” and stated in its announcement that “spreads in the areas where the program is now focused have narrowed significantly.” So far, TALF funding has not been applied to the purchase of commercial real estate securities. The Wall Street Journal reports that details remain sketchy on the expansion of TALF funding to CMBS. Perhaps investors will respond better to CMBS? If not, as Chandan states, policy makers may need to “revisit options for improving commercial mortgage credit conditions.”