The US Federal Reserve and Treasury on Tuesday extended a new securities loan programme to include equipment and vehicle fleet leases and said a future expansion to $1 trillion may also include some of the riskier mortgage and debt securities now plaguing banks.
Launching the long-awaited $200 billion Term Asset-backed Securities Loan Facility, or TALF, the Fed and Treasury said the program will start offering loans on March 17. As collateral, the TALF will accept triple-A rated asset-backed securities supported by new and recently originated auto loans, credit card loans, student loans and government-guaranteed small business loans.
The Fed and Treasury also said they were considering accepting a broader range of securities that would be supported at a later date. These include commercial mortgage backed securities as well as "private label" residential mortgage backed securities and collateralised debt obligations.
The TALF is designed to give frozen securitisation markets a jolt by offering financing for investors to encourage them to buy AAA-rated asset-backed securities. In February, Treasury Secretary Timothy Geithner announced plans to expand the program to up to $1 trillion by increasing the Treasury's backing for the program with $100 billion of federal bank bailout funds.
"Ultimately, the program should bring down the cost and increase the availability of new credit to consumers and businesses," the Treasury said in a position paper. Adding commercial mortgage backed securities to the program could head off major problems in commercial real estate by providing new financing options.
"We know right now there's a looming crisis in commercial real estate whereby owners of shopping malls, hotels, rental properties and many other types of buildings are unable to refinance or pay for new construction because the CMBS securitisation market has completely shut down," Fed Chairman Ben Bernanke told the Senate Budget Committee on Tuesday.
Markets for the securitisation of loans have broadly ground to a halt since the financial crisis worsened in October, making it difficult for would-be new-car buyers to get loans or to conclude other basic consumer transactions.
By April, the Fed and Treasury anticipate that the loan program will include asset-backed securities backed by small ticket equipment, heavy equipment and agricultural loans and leases. These include items ranging from office copiers for small businesses to giant construction cranes and farm harvesters. Treasury and Fed said their teams are analysing "appropriate terms and conditions" for CMBS and are "evaluating" other types of triple-A-rated securities.
If the program includes private-label mortgage-backed securities and collateralised loan and debt obligations, the program could help lift some of the most illiquid assets from banks' books, taking pressure off their balance sheets. Private label MBS not backed by Fannie Mae or Freddie Mac helped fuel the US home price bubble that burst in 2007, bringing some financial institutions to their knees.
"The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can be most efficiently added to the TALF at a low and manageable risk to the government," they said.
In addition, the Fed and Treasury said they might include non-auto floor loans as well as securities backed by mortgage-servicer advances. But the Fed warned that increased TALF lending and other actions to stabilise the financial system "have the potential to greatly expand" the Fed's balance sheet, already bloated to nearly $2 trillion by other lending and liquidity programs.
Therefore, it needs more ability to manage its balance sheet and therefore, the level of reserves in the banking system. Treasury and the Fed said they will seek legislation to give the Fed additional tools needed to manage the level of reserves while providing necessary funding for TALF and other liquidity programmes.