UPDATE 1-Investor requests soar for Fed's CMBS TALF loans

(Changes headline, adds background)

By Al Yoon

NEW YORK Aug 20 (Reuters) - Investors sharply increased requests for loans in the second round of a Federal Reserve emergency program to boost lending in the ailing commercial real estate sector, the Federal Reserve Bank of New York said on its website on Thursday.

Loan requests of $2.28 billion under the Fed's Term Asset-Backed Securities Loan Facility more than tripled the disappointing $669 million in the first "legacy" CMBS TALF funding operation in July.

The program was created to lower borrowing costs in the commercial mortgage market, seen as one of the weakest links in the U.S. economy as it emerges from recession. Yield spread premiums since March have already plunged by more than half, in part as investors bought in anticipation their bonds would meet requirements for TALF.

Demand from investors would likely have been even stronger if CMBS yields had not rallied as much, said Scott Buchta, a strategist at Guggenheim Capital Markets in Chicago.

"There have been some TALF funds that have been frustrated by tight spreads and had not bought as much as they had the capacity to buy," said Buchta, who added that the program could still grow in coming months.

The Fed next week will disclose which, if any, bonds presented by investors it ultimately rejected.

Fed officials have highlighted the sector's importance to the overall economy numerous times in recent months, underscoring the central bank's commitment.

But lenders may remain reluctant to refinance billions of dollars in loans made under questionable terms, even if rates keep falling, analysts said. Building revenues needed to pay debts are falling, and prices are down more than 35 percent since October 2007, forcing borrowers either to boost equity in their properties or plead for extensions of current loan terms.

In a nod to the program's importance, the Fed earlier this week extended TALF for "legacy" CMBS and consumer assets such as credit cards, to March 31 from December.

The TALF for newly issued CMBS, which has yet to get off the ground, was extended to June 30. (Editing by Dan Grebler)