TALF Expected to Curb Bank Owned Foreclosures

by Simon Lindsay on Foreclosure Help

The Term Asset-Backed Securities Lending (TALF) will be expanded to residential mortgage-backed securities (RMBS) as part of the U.S. Federal Reserve’s effort to stop bank owned foreclosures and recession. The TALK expansion also aims to eliminate devalued bonds in banks to increase lending and boost prices.

Federal Reserve Bank of New York’s Vice President Hayley Boesky said that the most challenging aspect of the expansion of TALF to RMBS is to ensure that proper credit analysis has been done on the risks that the agency might expose itself.

The Federal Reserve has announced its plan to borrow from TALF using the old commercial-mortgage bonds. Boesky explained that the agency’s heterogeneous nature makes it difficult to protect itself from home-loan bond losses.

Meanwhile, the central bank is planning to recruit collateral managers to review and analyze the home loan debt to determine the amount of capital investors will need to put up when they want to avail of loans.

The Public-Private Investment Program (PPIP) that Treasury Secretary Tim Geitner announced is expected to supplement the agency’s loans and co-investments with additional financing from TALF.

On the other hand, the TALF loan is also available to investors as the U.S. government looks for ways to drive prices up for the nearly $2 trillion of home-loan bonds, without government support to free funds and banks to establish new credit. Boesky noted that TALF is being used for PPIP.

Another thing to note about TALF expansion is that home loan bonds may require concessions on the duration of the loans by the Federal Reserve. The agency agreed to investor requests and has offered commercial-mortgage bond financing for a maximum of five years.

Natixis SA managing director Ralph Dionisio said that investors may prefer loans for longer than seven years as the U.S. government’s program to use residential mortgages to modify loans to prevent foreclosures expanded the average security length.

Meanwhile, the Federal Reserve noted the success of the TALF, citing the establishment of eligible asset-backed securities, including credit-card bonds. Boesky added that the success of TALF has drove down yields comparative to benchmarks on securitized debt. She noted that securitized debt accounted for nearly 60 percent of the lending activity before insurance affected the industry’s coffer in 2008.

The Federal Reserve reiterated its commitment to come out with a guidance on TALF to make it easier and faster to stop bank owned foreclosures and reverse the economic downturn.