Developers Realty (NYSE:DDR)
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5 Years : From Jul 2012 to Jul 2017
The Federal Reserve on Friday will conduct the last round of purchases of existing commercial mortgages, marking the end of a government program designed to buoy markets and boost investor confidence in securities that have been battered since the financial crisis in 2008.
The end of this part of the Term Asset-Backed Securities Loan Facility, or TALF, leaves a corner of the commercial mortgage market on its own, and investors won't see new deals until later in the year, when regulators are expected to provide more clarity on securitization.
While the Fed's role has been small relative to other programs--the central bank has granted only $11 billion in loan requests since last June--the impact has been much larger in a sector still in the throes of a painful correction.
"TALF provided psychological support for the market," said Darrell Wheeler, head of commercial mortgages at Amherst Securities. "It served its purpose at the time it was needed."
TALF initially was set up to restart the issuance of asset-backed securities. The Fed extended it to both new and old commercial mortgages at the behest of the industry, which was grappling with frozen markets in 2008 and early 2009. The bleak outlook and a lack of capital and deals prompted the sector to seek succor from the central bank. The continued lack of activity and rising concerns about the impact of unemployment on retail and office properties late summer last year prompted the Fed to extend the program.
Investors say the market has thawed appreciably after the government started to buy these instruments under TALF, helping to reduce risk premiums in the secondary market. The easing of risk encouraged issuers to offer the first commercial mortgage bond in more than 18 months last November from Developers Diversified Realty.
Under the aegis of TALF, that deal was oversubscribed and two additional deals were offered in quick succession to tap the residual investor interest.
There has been little else since then, but investor attitudes have brightened since the dark days of spring 2009 and there is more confidence that the $770 billion market will be able to recover on its own.
Still, one question may yet delay new CMBS deals: That is the matter of whether issuers need to retain a stake in the deal, Wheeler said. In the past there was no requirement do so, prompting criticism that the lack of a stake in a deal encouraged banks to sell deals they wouldn't hold in their own portofolios.
"This lack of clarity is limiting loan origination to the largest banks who have the capacity to hold these loans on balance sheets if they can't securitize them," Wheeler said.
Sentiment in the secondary market where exisiting deals are traded is better, though much of the confidence stems from lower prices. Even though the oulook for the sector remains dim with rising delinquencies and falling property prices, interest from both traditional and non-traditional investors has ramped up.
Many see these bonds, with built-in cushions to protect investors in the event of default, are seen as safer investment options. They also are attractive given that their prices are much cheaper than comparable assets in other classes, and with yields on top-rated bonds between 7% and 12%.
Roger Bayston, a senior vice president at Franklin Templeton Fixed Income, said his company continues to hold commercial mortgages.
He added that price dislocations in the market opened up buying opportunities, especially among lower-rated tranches.
While TALF helped jumpstart consumer-related asset-backed issuance, additional complexities of pooling commercial loans, the longer terms of those loans, and the continued deterioration of the fundamentals backing those loans, made the program much less effective, Bayston said.
"TALF is no longer a big factor, and doesn't have much influence in new issue CMBS," he said.
So it's unlikely that there will be another request to extend the program for new issues beyond the June deadline.
"Six months ago, it was important to extend the deadline on TALF for new issues. Now the market has moved on," Wheeler said.
-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; firstname.lastname@example.org