The Term Asset-Backed Securities Loan Facility, or TALF, began in an effort to jump start the economy by increasing lending on many different types of assets. So far, the $1 trillion fund has been used to lend money to investors who buy consumer debt. Recently, the Fed announced that they will allow the use of TALF funds for the purchase of commercial real estate debt. "This program is critical to restoring the flow of credit to owners of commercial real estate and preventing a damaging chain of events in this market," Treasury Secretary Timothy Giethner recently stated.
Two objectives of the program are to create a market for originated but unsold CMBS and to thaw the market for new CMBS issuance. As many banks and financial institutions begin to sell pools of loans off their books, the TALF program allows banks to originate new debt, confident there will be a market to sell the loans after they originate it. The overlying principal is conservative lending. TALF funds can only be used to buy the AAA, or highest rated tranches of CMBS pools. Many CMBS loans originated in the last 24-48 months were underwritten too aggressively as Standard & Poors expects to cut the ratings of many pools that were securitized between 2005 and 2007, making them ineligible for TALF funds.
With an influx of capital returning to purchase commercial real estate debt, some large banks and financial institutions have begun originating loans that will attract TALF buyers. As time passes and liquidity in the CMBS market increases, look for more and more banks to start originating debt that can be pooled and sold as CMBS, greatly increasing liquidity in the marketplace. Although it will take time, this liquidity in the CMBS market will relieve pressure for many lenders with commercial real estate loans on their balance sheet.
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