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Piece of Good News

Starved for good news, the lending community earned a major victory in February in the effort to revive the commercial mortgage-backed securities (CMBS) market and restore investor confidence.

A major component of the Financial Stability Plan unveiled by Treasury Secretary Timothy Geithner calls for expanding the Term Asset-Backed Securities Loan Facility (TALF) to $1 trillion and allocates part of the program to purchase AAA-rated CMBS.

“The intent here is not to have the federal government become the CMBS buyer of last resort or to even bail out the commercial mortgages,” according to David Cardwell, vice president of capital markets and technology for the National Multi Housing Council. “It's an attempt to try and provide some liquidity to the loans that are maturing in the commercial mortgage-backed securities market.”

Of the $806 billion in commercial and multifamily mortgages held or related to CMBS, collateralized debt obligations or other asset-backed securities, $90.5 billion will mature in 2009, followed by $61.9 billion in 2010, according to the Mortgage Bankers Association (MBA).

The Fed's move will mean that high-quality loans with reasonable debt-service coverage and loan-to-value ratios can be issued without a significant level of tranches because there is a AAA buyer, according to Cardwell. The move couldn't come soon enough for a CMBS industry that is in total hibernation after being a major driver of commercial real estate finance for several years. After a record-setting $230 billion in domestic CMBS issuance in 2007, total U.S. issuance in 2008 plummeted to $12.1 billion with no issuance in the second half of the year.

TALF was initially launched in November 2008 as a $200 billion government loan facility designed to stimulate investment in car loans, student loans, credit cards and small business loans. The inclusion of commercial real estate in the “son of TALF,” as some industry experts refer to the facility, comes on the heels of intensive lobbying efforts for federal assistance by the MBA, the Commercial Mortgage Securities Association and 10 other trade groups.

The importance of the expansion of TALF can't be overstated, said Jan Sternin, senior vice president of the commercial/multifamily division at the MBA, during the association's 20th annual convention in San Diego in January. With so much focus over the past year on government steps needed to stabilize the housing market, the commercial real estate sector was in the shadows.

But the economy started to deteriorate rapidly during the second half of 2008.

“Property fundamentals went down, and loan delinquencies started to rise. We knew we had to do something,” says Sternin. “The trade associations came together, they sent joint letters, they had joint meetings.”

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