On May 19, 2009, the Federal Reserve Bank of New York (NY Federal Reserve) announced the expansion of its Term Asset-Backed Securities Loan Facility (TALF) to include commercial mortgage-backed securities issued before January 1, 2009 (Legacy CMBS). The TALF program, launched by the NY Federal Reserve in March 2009, is intended to increase the availability of credit and support economic activity in the United States by providing non-recourse loans to purchasers of newly issued asset-backed securities (ABS). Including Legacy CMBS as eligible collateral for TALF loans is intended to promote price discovery and liquidity for those securities. The Federal Reserve Board expects that improving the market for these securities should facilitate the issuance of new CMBS and thus help borrowers finance new commercial mortgages and refinance existing commercial mortgages on better terms.
Generally, the terms and conditions of the TALF program applicable to newly issued CMBS will apply to Legacy CMBS. To qualify as eligible collateral for TALF loans, Legacy CMBS must not, upon issuance, have been junior to other securities with claims on the same pool of assets. Eligible Legacy CMBS must entitle holders to principal and interest payments (i.e., they may not be interest- or principal-only securities) and must bear interest at a pass-through rate that is fixed or based on the weighted average of the underlying fixed mortgage rates. Legacy CMBS must have a credit rating in the highest long-term investment-grade rating category (which may not be based on a third-party guarantee) from two TALF CMBS-eligible rating agencies (i.e., DBRS, Inc., Fitch Ratings, Moody's Investors Service, Realpoint LLC and Standard & Poor's) and must not have a credit rating below the highest investment-grade rating from any such rating agency. Legacy CMBS issued by an agency or instrumentality of the United States or a government-sponsored enterprise are not eligible for the TALF program.
Each Legacy CMBS must evidence an interest in a trust fund consisting of fully funded mortgage loans and may not include other CMBS, other securities or interest rate swap or cap instruments or other hedging instruments. A participation or other ownership interest in a loan will be considered a mortgage loan and not a CMBS or other security if, following a default, the interest is senior to or pari passu with all other interests in the same loan in right of payment of principal and interest. The security for each mortgage loan must include (or, if payments due under the loan have been defeased, the security for the loan or its predecessor must have previously included) a mortgage or other similar instrument on a fee or leasehold interest in one or more income-producing properties, at least 95% of which, measured by related loan principal balance, must be located in the United States or its territories as of the TALF loan subscription date.
The NY Federal Reserve, assisted by a collateral manager to be engaged, will determine the eligibility of Legacy CMBS through a risk assessment process, and may reject any CMBS. The NY Federal Reserve will pay particular attention to mortgage pools with large historical losses; concentrations of loans that are delinquent, in special servicing or on watch lists; concentrations of subordinate-priority loans; and CMBS mortgage pools that are not diversified with respect to loan size, geography, property type, borrower sponsorship and other characteristics.
Purchasers of Legacy CMBS may elect TALF loans with either three-year or five-year maturities. Three-year TALF loans will bear interest at a fixed annual rate of 100 basis points over the 3-year LIBOR swap rate, and five-year TALF loans are expected to bear interest at a fixed annual rate of 100 basis points over the 5-year LIBOR swap rate. The TALF loan amount will equal the dollar purchase price of the Legacy CMBS less the base dollar haircut (from par). The base dollar haircut will be 15% for Legacy CMBS with an average life of five years or less, increasing by 1% of par for each additional year of average life beyond five years. For example, for a CMBS with a par of $100, a purchase price of $75 and an average life of seven years (and thus a base dollar haircut of 17% of $100, or $17), the TALF loan amount would be $58 ($75-$17). A Legacy CMBS will not be eligible TALF collateral if its purchase price is less than its base dollar haircut. Any remittance of principal on a Legacy CMBS must be used immediately to reduce the principal amount of the TALF loan in proportion to the haircut. Additionally, some of the interest received on collateral securing the loans may be applied to accelerate repayment of the TALF loans, particularly in the fourth and fifth years of five-year loans.
The NY Federal Reserve may limit the volume of TALF loans to be secured by Legacy CMBS and is considering whether to allocate the loans through an auction or other procedure. The NY Federal Reserve is also developing other requirements applicable to Legacy CMBS, including the requirement that TALF loans secured by Legacy CMBS be used to fund recent arms-length secondary market transactions between unaffiliated third parties, and is considering a process to validate prices in such transactions.
The initial subscription date for TALF loans to purchase Legacy CMBS will be in late July, and the subscription and settlement cycle for such loans (along with loans for newly issued CMBS) will occur in the latter part of each following month. The cycle for loans secured by non-CMBS asset-backed securities will continue to be at the beginning of each month.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.