Treasury Expands Loan Facility to Include CMBS

Treasury Expands Loan Facility to Include CMBS

Feb 10, 2009 - CRE News

The Department of Treasury is expanding the government's Term Asset-Backed Securities Loan Facility to include CMBS.

The move was outlined this morning by Treasury Secretary Timothy Geithner as part of a broad expansion of what had previously been called the Troubled Asset Relief Program and is aimed at jump-starting credit markets. Equity markets scoffed at the massive plan, with the Dow Jones Industrial Average plummetting 382 points to less than 7,900.

It's new effort, the Financial Stability Plan, is a multi-pronged attack that calls for increased transparency among financial institutions, more forward-looking risk evaluations by bank regulators and a capital-assistance program through which the Treasury would make investments in banks in need of added capital to weather the economic downturn.

"To get credit flowing again, to restore confidence in our markets, and restore the faith of the American people, we are fundamentally reshaping the government's program to repair the financial system," Geithner said.

The inclusion of CMBS in the lending facility, under which financing would be provided to investors in the highest-rated securities, was long sought by industry groups, including the Commercial Mortgage Securities Association and the Real Estate Roundtable.

"Treasury is pursuing the right strategy now to help avoid a potential foreclosure disaster in the commercial real estate sector, which is a cornerstone of the economy ... Left unchecked, this could have extremely negative implications for local communities, jobs, and investors," said Jeffrey DeBoer, chief executive of the Real Estate Roundtable.

But the plan still falls short.

According to a briefing by Real Estate Economics, "Significant impediments to lending and securitization remain unaddressed." It cited as challenges limiting TALF's effectiveness the "misalignments of incentives" for originators, issuers and rating agencies and restrictions against the modification of securitized mortgages.

"Any program that fails to address these and other structural impediments to the renewal of CMBS activity will fail to improve appreciably upon the current shortfall in securitization activity and overall commercial mortgage credit availability," it said.

The plan was originally for the Treasury to make available $20 billion of financing, which could be used to leverage up to $200 billion of investments. That has grown to $100 billion, which theoretically could be used to make $1 trillion of investments.

"CMSA is very hopeful with Secretary Geithner's comment today that 'no plan will be successful unless it restarts the securitization markets,'" said Kenneth Reed, the trade group's spokesman. "If it's implemented effectively, the TALF extension to CMBS should help restore liquidity and address the billions in commercial real estate loans coming due in the next several years."

Besides expanding the lending facility, the Financial Stability Plan proposes forming a public-private investment fund with $500 billion of capital that could be used to help private entities acquire "legacy assets", primarily real estate, from lenders. The idea is to "help start a market for the real estate related assets that are at the center of this crisis," Geithner said. The fund could grow to $1 trillion.

"This initiative will kick-start the secondary lending markets," Geithner said, "to bring down borrowing costs and to help get credit flowing again."

Treasury also established a Web site, www.financialstability.gov, through which it says people would be able to see whether restrictions tied to the plan are being met and whether they are impacting the volume and cost of borrowing.

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