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WASHINGTON, D.C. — Starting in July, the Federal Reserve will include legacy commercial mortgage backed securities in its Term Asset-Backed Securities Loan Facility (TALF) program, a $1 trillion plan first announced last November. These securities can now be used as collateral when taking out new TALF loans.

The news represents a gradual increase of the program’s scope. TALF was originally designed to increase liquidity in the market by providing loans for commercial real estate developers and owners using newly issued commercial and asset-backed mortgage securities as collateral. On May 1, the program was expanded to encompass loans starting with the June subscription. Now, CMBS issued before January 1, 2009, are included as well.

“This is welcome news for the commercial real estate lending market, since it will allow a number of capital providers the opportunity to move these assets from their balance sheets and replenish capital,” says D. Scott Dixon, president of Atlanta-based RBC Capital Advisors. “As these lenders are able to replenish capital, we are hopeful that they will resume providing new loans to developers and owners.”

To be covered under the new rules, securities must have two AAA ratings from DBRS, Fitch Ratings, Moody’s Realpoint or S&P. If any of these organizations rate the security below AAA, the security can’t be included in the program. The CMBS must also be senior in payment priority to all other interests and meet certain additional criteria outlined by the Federal Reserve. According to a new release, the CMBS market has financed 20 percent of outstanding commercial mortgages.

Dixon says the Federal Reserve has taken the right steps in trying to free up capital, but warns that it may take a while for financial institutions to increase the volume of loans issued.

“The effect will likely not be immediate,” Dixon says, “but we are cautiously optimistic that we will see a gradual thawing over the next two quarters.”

— Jon Ross

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