The Federal Reserve Board said that starting in July, certain high-quality CMBS issued before Jan. 1 or legacy CMBS will become eligible collateral under the Term Asset-Backed Securities Loan Facility (TALF).

The Board authorized the TALF on November 24, 2008, under section 13(3) of the Federal Reserve Act. Under the TALF, the Federal Reserve Bank of New York (FRBNY) has extended loans secured by triple-A-rated newly issued ABS. These are backed by certain consumer and business loans and leases. On May 1, the Board announced it would expand the range of acceptable TALF collateral to cover newly issued CMBS starting with the June subscription.

On March 23, the Federal Reserve announced that it would evaluate extending the list of eligible collateral for TALF loans to include certain legacy securities. The objective of the expansion is to restart the market for legacy securities. It is also aimed at stimulating the extension of new credit by helping to ease balance sheet bank and other financial institution balance sheets.

The Federal Reserve  in a release said that the CMBS market, which has financed around 20% of outstanding commercial mortgages, including mortgages on offices and multi-family residential, retail and industrial properties, came to a standstill in mid-2008. The extension of eligible TALF collateral to cover legacy CMBS is meant to promote price discovery as well as liquidity for legacy CMBS. The resulting improvement in legacy CMBS markets should facilitate the issuance of newly issued CMBS, thus helping borrowers finance new purchases of commercial properties or refinance existing commercial mortgages on better terms.

To be eligible as collateral for TALF loans, legacy CMBS must be senior in payment priority to all other interests in the underlying pool of commercial mortgages and meet certain other criteria made to protect the Federal Reserve and the Treasury Department from credit risk. The FRBNY will review and reject as collateral any CMBS that does not meet the published terms or otherwise poses unacceptable risk.

Eligible newly issued and legacy CMBS must have at least two triple-A ratings from DBRS, Fitch Ratings, Moody’s Investors Service, Realpoint, or Standard Poor’s and must not have a less than triple-A from any of these rating agencies. The Federal Reserve is also formalizing procedures for determining the set of rating agencies whose ratings will be accepted for various types of eligible collateral in the Federal Reserve’s credit programs.

The initial subscription date for TALF loans collateralized by newly issued CMBS will be June 16. The subsequent subscription dates for TALF loans collateralized by newly issued and legacy CMBS will be announced in advance.

Meanwhile, the Fed said that subscription date for loans backed by all other ABS will still be toward the start of the month.


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