The Federal Reserve broadened a key lending program to support more
commercial real estate loans, expanding its rescue of the financial
system to deal directly with some of the assets weighing down banks.
The move is the Fed's first attempt to use its unlimited lending
capacity to try to support markets for "legacy securities," or those
that were created months or years ago. Previously, the Fed program
supported only new commercial real estate lending. Many legacy loans
are clogging balance sheets of banks and other lenders. There are few
buyers or sellers for these assets, even those that are generally
regarded as safe investments. Government officials have been seeking
ways to buy up these and other assets, thus removing them from bank
balance sheets. But the programs, announced in March, have been slow to
get rolling.
Starting
in July, the Fed will allow investors participating in its Term
Asset-Backed Securities Loan Facility to purchase existing securities
backed by loans for apartment complexes, office buildings, retail
shopping centers and other commercial property. In effect, the Fed will
provide investors with large loans to buy highly rated securities. The
TALF program, which originally supported mainly consumer lending, uses
Fed and Treasury money, and could reach $1 trillion. If the Fed's
efforts to start up commercial real estate lending works, it could
begin to help an industry that many analysts believe is on the verge of
massive losses. Between this year and 2011, $814 billion in commercial
real estate loans are expected to mature, research firm Foresight
Analytics estimates. With banks reluctant to lend, the market for
so-called commercial mortgage-backed securities is virtually moribund.
And with operating earnings from many commercial properties plummeting,
there could be a wave of foreclosures on office, retail and other
commercial properties absent new sources of lending. Fed officials are
also hoping that their new steps will create a more active market for
commercial mortgage securities, giving banks and others more leeway to
sell them or hold them on their books at a price that reflects their
long-term value, instead of what they would currently sell at in a
distressed market. Moreover, they argue that by helping restart the
market for existing CMBS, lending will be more widely available for new
commercial real estate loans, allowing owners to refinance as their
loans come due.
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