Monday, February 23, 2009

Fed May Need to Recast TALF on Commercial Real Estate

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Commercial real estate has been our radar as an area of major issues since latter 2007 as long time readers will attest. I think commercial real estate will be to 2009 what financials were to 2008. [Dec 4, 2007: Et tu, 1st half 2008? Predictions for the Coming 6 Months]

Commercial real estate will start to drop. Thus far it has held up, but in a slowing economy why would rental rates hold up? They won't. It won't be as bad as residential real estate, but it will be far worse than it is today.


The depths of the problems are finally starting to hit those in the know.... $1 Trillion of TALF money (which is supposed to create a market for credit cards, auto loans, student loans, personal loans and the like) might have to be pushed strongly to the commercial market. [Jan 13, 2009: Bailout Nation Continues in Commercial Real Estate Land - "Lemme In on that Money"] [Dec 22, 2008: Wall Street Journal - Property Developers Ask for Government Bailouts] But that's ok, we'll just create a new $1 Trillion TALF (TALFtoo!) for the autos, credit cards and like. It truly is amazing how the Federal Reserve is effectively the banking system...[Nov 26, 2008: Federal Reserve on Hook for $8+ Trillion]

Again let me reiterate the Federal Reserve is supposed to have a pristine balance sheet and only keep the "best of the best" in its accounts. As the financial crisis unfolds they are taking increasingly awful merchandise and assuring us "it's ok - AAA rated and all". Who bails out the Federal Reserve?

Via Bloomberg
  • The Federal Reserve may need to loosen the terms of a new $1 trillion credit initiative aimed at averting a meltdown in commercial mortgage-backed securities, analysts and industry representatives said. The Fed would prop up the CMBS market by lending against the securities for a five-year term rather than three years, and taking as collateral existing debt rather than just new bonds, they said. The Fed initially proposed a one-year term for TALF loans it will make before revising to a three-year period in December. (1 year... to 3 years... to 5 years... just make it a 100 year loan - the taxpayer is good with it)
  • “If we don’t get credit flowing again to commercial real estate” through programs like the TALF, “we’ll probably see a very significant increase in defaults on commercial mortgages and further stress on the balance sheets of banks,” said Richard Parkus, an analyst at Deutsche Bank AG in New York.
  • Failure by the Fed and Treasury to rekindle private investment in the $760 billion CMBS market may worsen the longest U.S. recession since 1982. Fed Chairman Ben S. Bernanke and Treasury Secretary Timothy Geithner are promoting the TALF as a cornerstone of plans to revive credit, end a decline in home prices and cleanse toxic assets from banks’ balance sheets.
  • The Fed, through the TALF, could reduce the cost of financing commercial real estate by taking as collateral CMBS already traded in the secondary market rather just new bonds, said RBS analyst Lisa Pendergast in Greenwich, Connecticut. Accepting bonds from the secondary market would be a “big deal” for reviving credit.
  • Bernanke said on Feb. 18 that the first phase of the TALF will begin “shortly.” That includes as much as $200 billion in loans for the auto, education, credit-card and small-business markets. The Fed has yet to provide details on the second phase, which would include CMBS and expand to $1 trillion.
  • Sales of CMBS plummeted to $12.2 billion last year, compared with a record $237 billion in 2007, according to estimates by JPMorgan Chase & Co. (that's a 95% drop for those playing at home) Top-rated commercial mortgage bonds are currently trading at about 10.79 percentage points more than benchmark interest rates, compared with 2.32 percentage points a year ago.
  • Without the TALF, the high cost to sell the debt makes it unprofitable for investment banks to write new loans, choking off funding to commercial property owners. Banks can’t profitably originate new loans at attractive rates for refinancing because the cost to securitize the mortgages and sell the resulting bonds would be too high given the current trading price for the securities.
  • The Fed may compound the long-term burden on its balance sheet by taking on CMBS. The central bank has already doubled its assets to $1.92 trillion in the past year by creating other emergency credit programs. (ah, that's ok - it's only money) The central bank may have to take losses on the assets or face higher costs of carrying them, he said.
[Jan 6: New York Times - As Vacant Office Space Grows, so Does Lenders' Crisis]
[Dec 15, 2008: Commercial Real Estate - You Can't Go Wrong]
[Nov 20, 2008: Commercial Real Estate Finally Hitting Home for Mainstream Media]
[Nov 12, 2008: REITs Continue to be a Gold Mine on the Short Side]
[Mar 4, 2008: WSJ - Building Slowdown Goes Commercial]
[Dec 2007: Credit Downturn Hits Malls]

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