April 16, 2009 / 10:30 PM / 11 years ago

Fed considers 5-year CMBS loans through TALF-WSJ

WASHINGTON, April 16 (Reuters) - The Federal Reserve is considering offering longer loans to investors in commercial mortgage-backed securities as part of a plan to help jump-start the market for commercial real estate debt, The Wall Street Journal reported on Thursday.

The Fed since Febuary has been analyzing appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and other mortgage assets as collateral for its Term Asset-Backed Securities Lending Facility (TALF).

The Journal quoted unnamed people familiar with talks between the Fed and the commercial real estate industry as saying that the Fed is considering a five-year term for loans on CMBS rather than the normal three year-term for TALF credit, but has not reached a conclusion.

A Fed spokesperson could not immediately be reached for comment on the report.

The longer-term financing is important to investors in commercial real estate debt, because the underlying mortgages are for usually for longer terms and investors would be less willing to hold these securities without longer-term financing.

The TALF is aimed at jumpstarting markets for a host of asset-backed securities, such as those backed by car loans, student loans, small business loans and credit card debt. By taking on these securities as collateral, the Fed can offer liquidity for new loans that frozen securitization markets are unable to provide.

But the Fed has shown concern about the quality and term of assets it is taking on its books as it expands the TALF, because it is reluctant to increase its credit risk.

The Journal said the Fed wants to avoid getting locked into long-term obligations because this could make it more difficult for the U.S. central bank to shrink its balance sheet once conditions start to improve.

CMBS issuance is frozen as investor flight from risk and concern about defaults on commercial property have boosted yields into the double digits, to a point that discourages lending. Lack of an ability to refinance recession-hit office, retail and other commercial properties could drive up defaults, adding pressure on the banking system. (Reporting by David Lawder)

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