By Neil Irwin
The Federal Reserve yesterday 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.
“I think the Fed’s actions will have an impact, but in and of itself they’re not enough to move the market enough to fix the problems,” said Matthew Anderson, a partner at Foresight Analytics. One reason the Fed programs are no panacea for the industry: They provide backing only for securities rated AAA by major rating agencies, which excludes many hardest-to-value assets.