Fed Extends TALF to Cover Commercial Mortgages

The Federal Reserve Board, which has been moving aggressively to breathe life into the residential real estate market, has announced new measures to boost commercial real estate as well.

The Fed announced Friday that it is extending the Term Asset-Backed Securities Lending Facility (TALF) program to include funding for commercial mortgages as of June 1. Loans to assist small businesses in purchasing property and casualty insurance will be allowed as well.

The TALF program does not make such loans directly, but instead will purchase commercial mortgage-backed securities (CMBS) and securities backed by insurance premium finance loans, thereby freeing up capital for lenders who deal in such loans.

"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 of maturing mortgages to make additional loans, and facilitate the sale of distressed properties," said the Federal Reserve Board of Governors in a statement.

The statement noted that CMBS accounted for almost half of new commercial mortgage originations in 2007 before the CMBS market came to a standstill in mid-2008.

Insurance premium ABS also to be allowed

The Fed Board also said the inclusion of insurance premium ABS as TALF-eligible collateral will facilitate the flow of credit to small businesses. It noted that more than 1.5 million insurance premium finance loans are extended to small businesses each year so they can obtain property and casualty insurance. The loans are often funded through the asset-backed securities (ABS) market and have become more expensive and more difficult to obtain since the shutdown of that market last fall.

Commercial lenders welcomed the news, and also applauded the Fed's announcement that it would extend the maximum loan term for eligible securities from three to five years.

"A five-year term is more consistent with the longer-term nature of commercial lending and will provide more flexibility to borrowers as they navigate the current real-estate cycle," said Christopher Hoeffel, president of the Commercial Mortgage Securities Association.

Will encourage accelerated repayment

The Fed has been reluctant to extend the terms of the program to five years, in part because it would limit its ability to pull capital back out of the market as the economy recovers and inflationary pressures build. To address that concern, it said that it may divert some of the interest on the loans toward an accelerated repayment, especially in the fourth and fifth years.

To limit potential losses, the Fed has also indicated that it plans to gradually increase investors' shares of potential losses in each of the five years.

The TALF program was established by the government in November 2008 in response to the freezing of the asset-backed securities market. The program authorized up to $200 billion in government funds to invest in asset-backed securities to free up lending.

Eligible investments were initially limited to auto loans, student loans, credit card loans and small business loans guaranteed by the U.S. Small Business Administration. The government indicated at that time that the program could eventually be expanded to include commercial mortgage-backed securities, so Friday's move by the Fed was one the commercial mortgage industry has been looking forward to for five months.