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April 03, 2020  

TALF Negotiations Yield Mixed Outcomes

The Federal Reserve appears open to the idea of expanding its new Term Asset-Backed Securities Loan Facility, but not to the extent that market participants hoped.

While discussions with industry professionals are ongoing, the early indication is that the Fed may be willing to extend the emergency program to include financing for collateralized loan obligations and commercial-mortgage bonds. It also may create a broader allowance for securities backed by mortgage-servicer advances.

However, sources said there has been little progress in convincing the Fed to write TALF loans against securitizations of private-label home loans, including those whose underlying accounts fall outside the Consumer Financial Protection Bureau’s “qualified-mortgage” standards. The industry wish list also includes bonds backed by aircraft leases, shipping-container leases, personal loans, reverse mortgages, small-business loans without government guarantees, timeshare loans and whole-business cashflows.

What’s more, the Fed apparently has shrugged off requests that TALF loans be made available for securities issued before March 23, when the regulator released a term sheet spelling out the program’s parameters.

The original version of TALF aimed to stimulate consumer and business lending after the 2007-2008 credit-market collapse by offering low-cost loans to investors who pledged their securitized-product holdings as collateral. The current iteration, brought on by the coronavirus crisis, functions similarly but covers a narrower band of deals.

Indeed, the Fed’s term sheet specifies that TALF loans are available only for triple-A-rated securities that were issued after March 23 and are backed by auto loans or leases, student loans, credit-card receivables, equipment loans, dealer-floorplan loans, insurance-premium loans, Small Business Administration loans and certain servicer-advance receivables.

“The Fed has asked technical questions about how certain deals are structured, which, as far as I can tell, means they are looking at an asset. For example, I know they have asked about [principal and interest] advances, CLOs and commercial mortgages,” Structured Finance Association chief executive Michael Bright said.

Bright added that the Fed has signaled a desire to insulate itself from credit risk, hence its focus on top-rated bonds.

The regulator also has expressed a desire to ensure that any TALF financing would support the origination of new collateral loans, hence the resistance to opening the program to deals completed before March 23. “We are pushing for them to either change that or open a new facility, but no bites yet,” Bright said.

The lack of a provision for home-loan deals remains the biggest disappointment, with the Fed making it clear from the beginning that it doesn’t view those transactions as a priority. The hope had been that TALF financing would serve as a lifeline to private-label lenders, which increasingly have paused originations amid a sudden and widespread loss of funding (see article on Page 2).

“I expected that to be the outcome,” one mortgage executive said. “The private mortgage sector has gotten zero support from the government thus far, yet the impact of the virus on the market has been a complete wipeout.”

While there’s no set date yet for TALF’s relaunch, the expectation is that the program will be operational by the middle of this month. TALF was created by the Fed under Section 13(3) of the Federal Reserve Act, but restrictions on aid programs under the Dodd-Frank Act have slowed its progress.