Less Hunger For TALF, Really?

The U.S. Federal Reserve on Thursday said that it has sanctioned $6.5 billion in loans to investors under its Term Asset-backed Securities Loan Facility (TALF). This action follows investors’ application for loans to buy securities backed by auto, credit card and other types of consumer loans, in the seventh round of such funding.

The current loan amount is down from $6.9 billion requested in August but up from $5.4 billion in July. Also, it is substantially lower from $11.45 billion in June. The overall decrease in investors’ appetite this month for government loans indicates that the investors are not relying much on the Fed for funding to buy these securities.

A total of $14.7 billion was borrowed by investors for purchasing eligible asset-backed securities sold by companies including American Express (AXP), Bank of America (BAC), General Electric (GE), Nissan Motor (F). Though Fed finance for the full amount was available, more than half of the new bonds were bought directly by investors without the support of the Fed. The proportion was even higher in some segments of the market, such as for bonds backed by payments on auto loans.

Less dependence on the Fed for buying such securities can be viewed as a sign of market stabilization, which will finally help remove emergency measures.

Investors also applied for $4.4 billion to buy credit-card loan-backed deals, versus $2.6 billion last month and $1.16 billion to buy auto-loan-backed deals, versus $555 million in the prior period.

Last month, the Fed extended the TALF by another six months. The move will primarily cushion the commercial real estate industry from rising defaults and falling prices.

The time extension will not cover assets that are not already eligible. The authorities approved the expansion of TALF for newly issued securities backed by auto, credit card, student and small business loans through March 31, 2010. Also, TALF lending against newly issued commercial mortgage-backed securities (CMBS) was extended through June 30, 2010 as the arrangement of new CMBS deals can take a significant amount of time.

With sharply declining funding costs, securities backed by credit cards, auto loans and equipment leases are a little more comfortable. But the securities backed by commercial mortgages are still a problem. So there is a need for TALF, as the weak market conditions are likely to persist for awhile. However, the central bank should focus more on the problems of the asset-backed market.

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