Non-Agency RMBS in TALF Are a Stretch, but Possible

Nonagency residential mortgage-backed securities still might be included in the Term Asset-Backed Securities Lending Facility program but it would be "particularly difficult" in the personal opinion of one Federal Reserve official.

William Dudley, president/CEO of the Federal Reserve Bank of New York, said in response to a question raised at an industry conference in New York about whether resecuritized real estate mortgage investment conduit securities might be considered for inclusion in TALF, that several hurdles exist for the inclusion of RMBS in general. Among these is how inclusion of nonagency RMBS in TALF might fit in with the Public-Private Investment Program, he said at the PPIP Summit held by the Securities Industry and Financial Markets Association and the Pension Real Estate Association.

Among other things officials also are looking at is whether there are enough of the AAA-rated securities TALF is limited to in the asset class, Mr. Dudley said. Ultimately, he said officials are considering not only whether inclusion of RMBS in TALF is doable but whether the benefits would be worth the cost. This combined with the Federal Deposit Insurance Corp.'s official decision last week to put its Legacy Loans Program on hold (outside of a plan to still test it using only receivership assets) illustrates how federal programs are taking steps forward but are still in trial-and-error mode when it comes to efforts aimed at restarting the securitized market.

The trial-and-error nature of the government efforts may only add to uncertainties that have maintained a wide gap between buyer and seller expectations that keeps the securitized nonagency mortgage market at a virtual standstill, but "you have to start somewhere," said Brendan Keane, senior vice president, advisory and valuation services, mortgage analytics. "You need something for people to follow." Government programs may not create demand for securitized nonagency mortgages but they do raise "awareness" of them, he said. When asked if such moves offer hope in terms of bringing back the securitized mortgage market, he noted that in the context of hope being a "smaller" concept than it used to be, these "baby steps" do offer it.

Signs of progress include the fact that among TALF deals this month was a mortgage servicer securitization, Mr. Dudley noted.

What Mr. Dudley said will be a key test of TALF's effectively is the rollout of its commercial MBS program. New CMBS are slated to start in early summer while legacy CMBS, and possibly legacy RMBS, are slated for later this summer, he said.

Also somewhat optimistic is the fact that the FDIC's decision to put the LLP on hold was prompted by signs of relative strength in the capital markets, albeit outside of the mortgage securities sector. Specifically, recent success banks have had in raising capital in the equities market in the wake of federal stress tests. Ultimately, it all adds up to a situation in which SIFMA's president/CEO T. Timothy Ryan Jr. put it, "We should feel better today," but "we're not out of the woods yet." What could help get the market out of the woods might be if the aforementioned small steps contribute to the building of the kind of "benchmark" for distressed nonagency mortgage assets the market needs to restart. This would serve as a "template" or way of handling distressed loans that produces proven results, said Mr. Keane, whose role at his company involves providing mortgage data and other services aimed at helping its public and private sector clients get a handle on distressed mortgage assets' true values and how they should be priced. He said a template could be operational in terms of how a program works or economic, in terms of the dollar amounts paid for assets.

An ongoing contrast between today's need for borrower-specific approaches to the collateral and the institutional nature of those holding it, combined with the redefault rate on loans and the fact that servicers are overstressed have been hurdles in establishing such a benchmark, he said.

Overcoming these obstacles may continue to be a "relatively slow" process, but it means the market "may be better footed when it does come back," Mr. Keane said.