Fed program to kickstart CMBS market slow going

NEW YORK (Reuters) - Investors have requested just $669 million loans from the Federal Reserve for older commercial mortgage-backed securities, a slow start for an emergency government program aimed at restarting the commercial real estate market.

With its Term Asset-Backed Securities Loan Facility (TALF), the Fed aims to lower borrowing costs in the sector by offering investors temporary funding for the assets.

Worsening conditions in the commercial mortgage market could increase defaults and weaken banks' finances, New York Fed President William Dudley said in June. Reviving the CMBS market, that finances office, retail and apartment buildings, was essential to stabilizing commercial real estate, he said.

Thursday was the first time investors could request loans for AAA-rated "legacy" commercial mortgage-backed securities that were issued before January 1, which include securities that were issued when underwriting standards were loose.

The program could help ease refinancings by borrowers, who are increasingly defaulting on loans for a lack of credit.

Interest in legacy CMBS was dampened by uncertainty about what securities were eligible under the TALF program, analysts and traders said.

Standard & Poor's fueled those doubts when it downgraded billions of dollars worth of top-rated securities this week, with more ratings cuts expected. This could mean a swath of securities would fail to meet the Fed's criteria.

The slow start for the program for existing CMBS mirrored that for other asset-backed debt in March. So far, the Fed has only made about $30 billion in TALF loans for consumer and small business asset-backed securities.

"Like with the ABS TALF, you are starting a whole market from scratch. That's never going to jump out of the gates," said Michael Feroli, an economist at JPMorgan, who expects the program to pick up steam in the coming months.

Thursday was also the second round for the Fed's newly-issued CMBS TALF program, which again saw no demand.

Due to the complexities of the origination and the structuring process of deals, new CMBS sales were seen more likely emerging in August or September. With no newly-issued CMBS available, no TALF loans were requested for newly-issued CMBS in June or July.

"There's a risk in origination because you have to make sure loans meet TALF criteria," said Ron D'Vari, CEO of NewOak Capital.

Bill Bemis, a structured products portfolio manager at Aviva Investors said trading activity in the secondary market had picked up in the days leading up to the first subscription period for legacy CMBS.

"Its been interesting, as far as how the market has performed in anticipation of the TALF. We saw well over one billion worth of trading in the last two or three days in a rush to get bonds settled before the deadline," said Bemis.

"While participation in the first month is not as big as anticipated, the market reaction has been positive for CMBS," he said.

CMBX 08-1 AAA traded slightly higher at 74.89 on Thursday, versus 74.13 in the prior session, according to Markit.com