Fed’s Commercial Real Estate Aid May Have Few Deals for Start

By Scott Lanman

June 16 (Bloomberg) -- The Federal Reserve may have few, if any, securities deals for the start of its program to aid the commercial real estate market and head off more losses at U.S. banks.

Today is the first monthly deadline for investors to apply for loans to buy new commercial mortgage-backed securities through the Term Asset-Backed Securities Loan Facility, or TALF. No issuers have publicly announced debt that’s eligible for the program. The Fed has made $25.2 billion in TALF loans for other securities, including those backed by auto and credit-card debt.

“I would be very surprised” if there are any deals this month, said Kevin Petrasic, a former official at the Office of Thrift Supervision who is now an attorney with Paul, Hastings, Janofsky & Walker LLP in Washington. “Unless the market really starts to pick up within the next couple weeks, I think July is going to be a little challenging as well.”

The stakes of TALF aid extend beyond the markets for office and retail space. Worsening problems in the commercial mortgage market may accelerate the drop in property values, increase defaults and weaken banks’ finances, New York Fed President William Dudley said this month.

Dudley set expectations low, saying in the June 4 speech that he didn’t expect any activity today because “the process for CMBS securitization takes quite a while to ramp up.”

“Don’t take that as a mark of the success of the CMBS effort, please,” he said at the time.

When Fed policy makers last met in April, some officials cited “mounting losses in commercial real estate, which could have substantial adverse consequences for regional banks and other financial institutions with significant concentrations of such assets,” according to minutes of the two-day session.

Deadline Today

Today’s application deadline applies to securities issued this year. In late July, the Fed will start accepting investor requests for loans to purchase older CMBS.

“This may be, and likely is, more challenging than dealing with other eligible assets,” said Laurence Meyer, vice-chairman of Macroeconomic Advisers LLC and a former Fed governor.

The Fed, acceding to an industry request in May, authorized TALF loans of as long as five years, up from three years for other parts of the TALF. Real estate groups including the Mortgage Bankers Association had lobbied the Fed for the extended loan terms.

Fed officials hope the TALF -- an emergency program that may make up to $1 trillion in loans -- will help revive the $760 billion market for CMBS. That in turn would lower interest rates and expand the availability of loans for the commercial real estate market.

Stabilize Market

“The revival of the CMBS market is essential to stabilizing the commercial real estate market,” Dudley said in the speech.

A slow start for the TALF’s CMBS support would mirror the first phase for other asset-backed debt, which began in March with $4.7 billion in requests followed by $1.7 billion in April. Loan requests exceeded $10 billion in both May and this month.

Demand was hampered in part by investor opposition to government restrictions on hiring foreign workers for firms that accepted the subsidized loans, and concern that Congress would try to retroactively tax earnings.

Sales of CMBS plummeted to $12.2 billion last year, compared with a record $237 billion in 2007, according to estimates by JPMorgan Chase & Co. There have been no sales of the debt since June 2008.

Deals have been few partly because it can take up to six months from the time a loan is originated to when it’s securitized.

Making Deals

“It takes a little while to put the deals together,” Petrasic said.

In addition, the Fed posted the legal forms for CMBS in the TALF on June 9, leaving little time for participants, said Chip MacDonald, a partner at law firm Jones Day in Atlanta.

“I’m not saying it can’t be done, but it certainly makes it more challenging and reduces the people who will participate in it,” MacDonald said. TALF-related CMBS activity may not increase for one or two months, he said.

Standard & Poor’s said last month it may cut the ratings of top-rated commercial mortgage bonds, rendering the older securities ineligible for the Fed program, which only accepts AAA rated bonds. The yield gap, or spread, relative to benchmark interest rates on the top-rated CMBS has widened about 2 percentage points to 8.39 percentage points since the May 26 announcement.

‘No Final Decisions’

“There have been no final decisions made about our new CMBS criteria,” Ed Sweeney, a spokesman for S&P, said in an e- mailed statement. “Once we have examined all of the feedback, we will issue the new criteria.”

By comparison, the yield premium investors demand to buy investment-grade corporate bonds compared with benchmark Treasury securities has declined to 3.38 percentage points as of June 12 from 6.04 percentage points at year-end, according to Merrill Lynch & Co. data.

Fed Chairman Ben S. Bernanke said in congressional testimony on May 5 that lending conditions in the commercial real estate sector are “still severely strained.”

“The more liquidity you can get in the market, the better off the commercial real estate market is going to be,” MacDonald said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net