With CRE Worsening, Time to Pull TALF?
With the nation facing a commercial real estate crisis over the next few years, a congressional panel is questioning whether this is the right time to terminate the only government-subsidized program that can remove troubled CRE loans from bank balance sheets.
Since its launch in June 2009, the Federal Reserve's TALF program has facilitated the sale of $9.2 billion of legacy commercial mortgage-backed securities.
While these sales represent only 1% of the $900 billion CMBS market, the Term-Asset-Backed Securities Loan Facility has helped stabilize the CMBS market, according to the panel, which serves as a watchdog for the Troubled Asset Relief Program.
Moreover, the body - officially known as the Congressional Oversight Panel - released a new report warning of a looming commercial real estate "crisis" that could further damage the economy and "prolong an already painful recession."
Of course, rising CRE delinquencies are old news to both commercial mortgage bankers that service the loans, and insurance companies, pension funds, depositories and others that hold the underlying loans and CMBS.
In its 190-page report, the COP cautions that nearly half of the $1.4 trillion in commercial real estate loans that need to be refinanced between 2010 and 2014 are underwater, which could lead to a "significant wave of defaults." The panel is worried that the Federal Reserve might be ready to terminate its legacy CMBS program on March 31. "Many analysts anticipate that the program's withdrawal will exacerbate the difficulties associated with refinancing CRE loans," the COP report says.
Under TALF, the Fed provides below-market-rate financing for investors that purchase legacy CMBS. (Through the use of TARP funds, the Treasury Department provides first-loss protection for the TALF program.)
The Fed also has a TALF program for newly issued CMBS, but to date it has attracted little interest and sunsets on June 30. Of the $2.33 billion in CMBS issued in 2009, $72.3 million, or about 3% of the total, was financed through TALF, the COP says.
The oversight panel estimates that commercial banks face CRE losses between $200 billion to $300 billion. Nearly 3,000 banks have significant CRE loan concentrations and small and midsized banks face the greatest exposure to writedowns and losses.
The report points out that commercial property values have fallen more than 40% since the beginning of 2007 with owners facing rising vacancy rates and declining revenue. "The underwriting standards of the bubble years were so aggressive that improving economic conditions are unlikely to save the loans made during this time," the report says.
Regulators are encouraging depositories to refinance CRE loans if the borrowers have the capacity to make payments on a new, restructured note.
This policy allows banks, for now, to avoid writedowns on problematic loans but the overall success will depend on a quick recovery of the overall economy. "Lenders obviously like" this policy, the COP says, but investors looking to buy distressed properties warn it will push losses into the future and slow the recovery of the CRE market.