May 22
2009
Everything Finance
TALF, Legacy CMBS, and Commercial Real Estate Lending
Craig Furfine
The Fed announced Tuesday that previously issued (legacy) commercial mortgage-backed securities (CMBS) will become eligible collateral for the Term Asset-Backed Securities Loan Facility (TALF). This comes less than three weeks after announcing that only newly issued CMBS would become TALF-eligible.
The mission of the TALF is to increase credit availability. So how does expanding TALF-eligible collateral to include legacy CMBS help the Fed achieve this goal? High yields on legacy CMBS discourage the extension of new credit towards the purchase of commercial property. From the perspective of a lender, owning senior CMBS arguably provides a safer exposure to commercial real estate than new loan extensions, while at the same time, delivers a yield well in excess of what could reasonably be obtained in the market for new credit extensions.
As of last Friday, the yield on TALF-eligible CMBS securities was 684 basis points above the 10-year Treasury rate. (This implies a yield near 10%.) By making legacy CMBS securities TALF-eligible, the Fed hoped to spur demand for these securities, and as a result, decrease their yield spread. A week later and three days after the Fed’s announcement, the spread on TALF-eligible legacy CMBS has narrowed to 495 basis points. This suggests that the Fed’s announcement has helped narrow spreads.
So will the Fed’s latest move renew interest in commercial real estate lending? To answer this question, consider that in May, 2007, CMBS that would now be TALF-eligible traded at a 30 basis point premium to 10-year Treasuries. While we are unlikely to see CMBS spreads return to such levels, a decline in TALF-eligible spreads of additional 200-300 basis points may be possible. What remains remarkable is that the yield spread on AAA-rated but TALF-ineligible CMBS remains at an incredibly high 1710 basis points over 10-year Treasuries, and this reflects a decline of 800 basis points in the last week! If we generously assume a 200 basis point TALF-eligible spread and a future securitization structured such that half of the securities are TALF-eligible and the other half priced at an average spread equal to the AAA but TALF-ineligible level, a securitizing lender would face a weighted-average cost of funds of 955 basis points over 10-year Treasuries – still well in excess of what can be achieved in the primary market. This suggests that although extending the eligible collateral for the TALF to include legacy CMBS may help lower spreads on legacy CMBS, spreads remain at levels unlikely to renew significant interest in new commercial real estate lending.
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1 Comment
Jun 22 2009
Anonymous Banker asks: Trepp LLC, TALF and JP Morgan Chase Connection… is there a conflict of interest?
With apologies, I had difficulty getting the links to connect into this comment. Please go to original article for links to supporting documents.
I hate the TALF program. It is going to come back to bite each and every one of us .... the taxpayers. First it was designed to get our securitization market flowing again, presumably to unfreeze the credit markets. It is to be a mechanism for the Treasury Department to guarantee, with our tax dollars, toxic loans stripped from the Banks’ balance sheets. It is duplicitous and it was designed to be that way. Now, in addition to subprime credit cards, subprime auto loans (FRBNY’s words, not mine), student loans, and small business loans, they’ve tagged on Commerical Mortgages.
So I went to the FRBNY’s website to read up on the terms and conditions and found that the FRBNY has hired a collateral monitor, a company by the name of Trepp LLC. And I was simply curious to find out if I could find out who really owned Trepp and if it’s involvement is as “arms length” as one would expect it to be.
Here is an interesting interview by CNBC with Tom Fink, senior vice president of Trepp. I noticed that CNBC never once asked him if there could be any perceived conflict of interest with Trepp accepting this position as “The Feds new Toxic Avenger”.
So, I pose this question to the blogging universe and to our leaders on the Hill and to President Obama:
How many Commercial Mortgages will Chase Bank be allowed to unload through TALF, a government program that has hired as its collateral monitor Trepp LLC whose UK Parent company utilizes, as their stockbroker, a company that is owned 50% by JP Morgan Chase.
Does anyone else see this as a conflict of interest?
Here’s the back up data to this question. Read it and decide for yourself. If you think I’m wrong, I’d love to hear you tell me why you think I’m wrong.
About Trepp, LLC
Trepp LLC, headquartered in New York City, is an established independent provider of CMBS and commercial real estate information, analytics and technology in the securities and investment management industry. Trepp serves the needs of both the primary and secondary markets by providing one of the largest commercially available trading quality CMBS deal libraries, as well as a suite of products for the CRE derivatives and whole loan markets. Trepp’s clients include broker dealers, commercial banks, asset managers, and investors.
About PPR
PPR, headquartered in Boston, is an established provider of independent global real estate research and portfolio strategy services to the institutional real estate community. PPR provides views on markets in North America, Europe and Asia and offers expertise in real estate markets, real estate portfolio analysis, mortgage risk, and the design of real estate investment strategies. Clients include commercial banks, insurance companies, Wall Street firms, rating agencies, government agencies, pension funds, investment advisors, real estate investment trusts, and private investors.
Trepp and PPR are each wholly owned by DMG Information, Inc., the business information division of Daily Mail and General Trust, plc (DMGT).
And here’s information on the parent company: Daily Mail and General Trust , plc (DMGT)
and their “stockbrokers”
Stockbrokers
JPMorgan Cazenove Ltd
20 Moorgate
London
EC2 6DA
Great Britain
Cazenove Group is a private company, registered in Jersey, which holds the 50% interest in J.P. Morgan Cazenove, the joint venture with J.P. Morgan. J.P. Morgan Cazenove is one of the UK’s leading investment banks. Jointly owned by J.P. Morgan and Cazenove, it combines innovative and impartial advice with a broad range of capabilities and proven execution skills.