Policy makers believe it is critical to get credit flowing to the $6.5 trillion real-estate industry. Defaults likely would rise if borrowers were unable to refinance loans as they become due.
The $700 billion market for existing CMBS, which is as big as the markets for securitized auto loans, credit cards and student loans combined, has rallied in the past two weeks on hopes for TALF.
Real-estate owners and investors who have talked to the Fed predict the central bank will begin offering some five-year loans under the government's Term Asset-Backed Securities Loan Facility, or TALF. That is longer than the three-year loans being offered.
While it may be a small change, the length of loans is a critical matter to the Fed, which prefers to make short-term loans. Longer-dated loans could make it more difficult for the Fed to fight inflation, as the bank can't pull back the money injected into the economy.
Industry executives hope that the TALF effort will resurrect the CMBS market. In 2007, about $230 billion of securities were sold.
No one is buying the government program, because the term of the loans are too short and the regulations are ridiculous.
The first TALF-eligible deals, involving securitized car loans and credit-card cash flows, began in March, but investor response to the program has been anemic. Investors applied for just $1.71 billion in loans on Tuesday in the second round of TALF, according to the central bank. That follows applications for $4.71 billion last month.
The country’s 10 biggest banks have $327.6 billion in commercial mortgages, which face a wave of defaults as office vacancies grow and retailers and casinos go bankrupt. A projected tripling in the default rate would result in losses of about 7 percent of total unpaid balances, according to estimates from analysts at research firm Reis Inc.
Commercial property prices are down almost 20 percent in the past year, and with the global recession worsening, there’s “significant stress” in the market, said William Schwartz, a credit analyst at DBRS Inc. in New York. Moody’s Investors Service is reviewing the financial strength ratings of 23 regional lenders, as “these losses are likely to meaningfully weaken the capital position of many banks in 2009,” said Managing Director Robert Young in New York.
So the Fed responded, today. Instead of being realistic, they proposed that if a borrower required a five year loan the rate for the first three years would be 200 basis points over LIBOR and for the next two years the rate would be 300 basis points. They assume that the market will have improved and private financing would be at lower rates. Thus, they would get their money back. If the private market does not improve, the higher rates will be a huge penalty. They are so naive, but so arrogant.
This will have a tsunami affect on the capital markets. Strap in for a rough ride!!!!
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