On May 1, 2009, the Federal Reserve released new terms and conditions for its Term Asset-Backed Securities Loan Facility (TALF) to include commercial mortgage-backed pass-through securities (CMBS) as eligible collateral for loans. The TALF is intended to make credit available to consumers and small businesses on more favorable terms by facilitating the issuance of asset-backed securities (ABS) and improving market conditions for ABS. The inclusion of CMBS as eligible collateral for TALF loans is expected to help prevent defaults on economically viable commercial properties, increase the capacity of current holders of maturing mortgages to make additional loans, and facilitate the sale of distressed properties.

To qualify as eligible collateral, CMBS must evidence an interest in a trust fund that holds fully funded, first-priority mortgage loans. The underlying mortgage loans held by the trust

  • must be current in payment at the time of securitization;

  • must have been originated on or after July 1, 2008;

  • may not provide for interest only payments during any part of its remaining term; and

  • must be secured by a mortgage or similar instrument on a fee or leasehold interest in income-generating commercial properties located in the United States or one of its territories.

The general terms of the TALF program apply to loans secured by CMBS. In addition, TALF loans secured by CMBS will

  • have a three-year or five-year maturity, at the election of the borrower;

  • bear interest at a fixed rate of 100 basis points over the three-year LIBOR swap rate for TALF loans with a three-year maturity and at a fixed rate of 100 basis points over the five-year LIBOR swap rate for TALF loans with a five-year maturity; and

  • require a collateral haircut of 15 percent for each CMBS with an average life of five years or less, with the collateral haircut increasing by one percentage point for each additional year of average life beyond five years.

No CMBS may have an average life beyond 10 years. The CMBS must bear interest at a pass-through rate that is fixed or based on the weighted average of the underlying fixed mortgage rates. In addition, for a five-year TALF loan, the excess of CMBS interest distributions over TALF loan interest payable will be remitted to the TALF borrower only until such excess equals 25 percent (10 percent in the fourth loan year and five percent in the fifth loan year) of the haircut amount, and the remainder of such excess will be applied to TALF loan principal. The New York Federal Reserve Bank will engage a collateral monitor to review proposed collateral, and reserves the right, until issuance of the CMBS, to exclude specific loans from each pool and the right to reject any CMBS for use as TALF loan collateral based on its risk assessment.

The pooling and servicing agreements, and other agreements governing the issuance of the CMBS, must contain certain provisions, including

  • representations from the mortgage loan seller that, upon the origination of each mortgage loan, the improvements at each related property were in material compliance with applicable law;

  • a prohibition on control over the servicing of assets by investors in a subordinate class of CMBS once the principal balance of that class is reduced to less than 25 percent of its initial principal balance; and

  • reporting requirements sufficient to enable the New York Federal Reserve to monitor and evaluate its position as a secured lender.

The initial subscription date for loans to be secured by CMBS will be in late June 2009. Additional details regarding eligible rating agencies for TALF CMBS and the assurances that must be delivered by issuers to confirm CMBS is TALF-eligible are being developed and will be announced before the initial subscription date.

The TALF CMBS Terms and Conditions and Frequently Asked Questions are available on the FRBNY Website. The Federal Reserve has also announced that securities backed by insurance premium finance loans will be TALF-eligible collateral and that authorized TALF loans with maturities of five years will be available to finance purchases of securities backed by student loans and loans guaranteed by the Small Business Administration.

If you have any questions concerning the TALF, please contact the co-chairs of the Economic Stabilization and Recovery Initiative:

Dominic J. De Simone, (215.864.8704; desimone@ballardspahr.com)

Thomas A. Hauser, (410.528.5691; hauser@ballardspahr.com)

Prior TALF Alerts

February 17, 2009
Term Asset-Backed Loan Facility - Federal Reserve Announces Additional Terms and Possible Expansion

January 6, 2009
Federal Reserve Announces Additional Details for its Term Asset-Backed Securities Loan Facility (TALF)

November 26, 2008
Federal Reserve and Treasury Announce Two New Programs to Boost Credit Availability

March 17, 2009
Term Asset-Backed Securities Loan Facility Becomes Operational

Copyright © 2009 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This newsletter is a periodic publication of Ballard Spahr LLP and is intended to alert the recipients to new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and specific legal questions you have.