Fed Moving To Support Commercial Real Estate Via TALF

The Fed is back to talking about using the TALF to finance commercial mortgage backed securities. You might recall that this was on the front burner early this month only to fade somewhat into the background. Unfortunately, not far enough into the background.

The WSJ did a story on this and I did a post as well. The Journal now says it’s ready to roll out the program. The argument for doing it is still the same. There are a lot of CMBS coming due later this year and even more next year and there is precious little money sitting around with an interest in refinancing these deals.

The spin this time is that even though yields on triple-A CMBS have fallen from 14% to 10% this is still too high. At this rate investors will just buy the existing debt and eschew new deals that need to be priced lower to make the loans economic.

Well, that’s part of the problem. As I pointed out before, this is a solvency issue as much or more than a liquidity issue. The loans underlying many of the maturing CMBS have insufficient cash flow to underwrite to the standards now prevailing. In many cases the capital stacks are larded up with subordinated and mezzanine debt. The actual cash flows are deteriorating and the pro forma cash flows under which the loans were originally structured may be achieved around 2020.

It’s all well and good for the Fed to step in and say they’ll buy the triple-A tranche but who’s going to buy the rest and who’s going to come up with the extra equity these deals need. Hopefully not the Fed.

The TALF is off to shall we charitably say a slow start. I’ve previously remarked as have others that it’s not going to ever amount to much so long as the demand for the lower rated tranches is slack. I don’t think that hole is going to get plugged just by changing the asset class.

It seems that with each new program the government is just digging a little deeper into the fabric of the economy. There was much talk about exit strategy today. I’m pretty sure there isn’t one and I’m becoming less convinced that the politicians want one. With that in mind, it’s a little bit depressing to see this move into commercial real estate shaping up.

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