06/05/2009

Banks Get Jump on Possible TALF Expansion

Mortgage lenders have started approaching rating agencies with securitization pools that they think might qualify for an expanded version of the Federal Reserve's Term Asset-Backed Securities Loan Facility.

The prospective issuers include many of the nation's largest banks, such as Bank of America, Citigroup, J.P. Morgan and Wells Fargo. It's unclear exactly what the institutions want from the rating agencies at this point, however, as the Fed has yet to approve proposals that would make mortgage bonds eligible for TALF financing.

That said, investors believe it's possible the issuers are simply trying to get a feel for how the rating agencies would treat mortgage-backed offerings these days. Indeed, it has been nearly a year since anyone securitized new private-label mortgages in the U.S., and much of the criteria for grading such deals has changed in the meantime. "They're just trying to get a handle on what may be a triple-A [rating]," one buysider said.

Mortgage lenders are certainly eager to see Fed-assisted securitization as a funding outlet. With open-market issuance costs currently prohibitive and whole-loan sales in a funk, many of those shops have been left holding inventories of loans that would be suitable for TALF deals. That is, if they were allowed. "They've got whole-loan pools they're sitting on and are thinking about securitizing into TALF," the investor said.

TALF was created to offer government financing to buyers of certain asset-backed securities, in a bid to stimulate production of the underlying credits. While the Fed has said it is thinking about adding private-label mortgage bonds to the list of qualifying issues, it has yet to take such action - even after expanding the program this month to take in commercial MBS and launching a search for residential-loan specialists.

With the eligibility of residential-loan issues still in limbo, it remains to be seen who would rate any such transactions. To qualify, asset-backed bonds must carry triple-A ratings from any two of the three major rating agencies: Moody's, S&P and Fitch. CMBS deals also need two top grades, but from a field made up of the three leading agencies plus DBRS and Realpoint.

So far, mortgage-bond issuers aren't approaching investors. That's because many buysiders won't be inclined to listen to sales pitches until after the Fed officially weighs in with specific financing criteria. "Investors would by-and-large be waiting for the TALF to come up with some more definition," an investor said.

Nonetheless, the fact that prospective issuers are drawing up securitization pools is viewed as a harbinger of deal production. "It sounds like something will develop," an investor said.

After slowing considerably in the early days of the credit crisis, the flow of private-label home-loan bonds completely shut off about a year ago. Excluding so-called re-Remics conducted largely for balance-sheet purposes, the last issuer to complete such a deal was Lehman Brothers, with a $147 million issue last August.

Looking forward, the loans most suited for securitizations would probably be jumbo mortgages, which are prime-quality credits that exceed the $417,000 buying limits of Fannie Mae and Freddie Mac. While the supply of those loans has fallen amid the credit crisis, their volume has held up better than other types of mortgages, including alternative-A, option-adjustable rate and home-equity loans. "The big four U.S. banks all do a substantial amount of jumbo prime," an analyst at an investment bank said. "I don't think there's any question that people would like to securitize jumbo prime."

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