After months of watching from the sidelines, there are two newcomers to the Term Asset-Backed Securities Loan Facility (TALF) playground.

The Federal Reserve on Friday announced commercial mortgage-backed securities (CMBS) and securities backed by insurance premium finance loans as of June are eligible collateral for TALF participation. The additions are aimed at stimulating lending in the commercial real estate and small business sector by allowing private investors to purchase securities with a matching government investment.

"The CMBS market came to a standstill in mid-2008," Fed officials said in a media statement. "The inclusion of CMBS as eligible collateral for TALF loans will 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."

Although the Fed pointed out that CMBS accounted for nearly half of new commercial mortgage originations in 2007, the CMBS market itself seems to have grown less appealing in recent weeks, with Standard & Poor's Ratings Services warning in early April of a coming slide in CMBS as the economic recession appears set to take a bite out of one of the few remaining real estate classes to survive much of the turmoil in financial markets worldwide.

“Since September/October 2008, Standard & Poor’s has witnessed significant deterioration in the credit performance of the CMBS transactions it rates,” said credit analyst James Manzi. “The economic recession combined with the absence of readily accessible financing in the capital markets has, in our opinion, skewed the credit risks related to the performance of CMBS sharply to the downside, and in excess of what we expected at origination or in our prior scenario analysis.”

Of course, the Fed's announcement to include CMBS in the latest round of alphabet soup programs designed to provide liquidity and confidence to the financial markets means government regulators hope to stem further deterioration. The Fed also said the inclusion of ABS backed by insurance premium finance loans to small businesses should facilitate the flow and affordability of credit to small businesses.

The Fed also authorized 5-year loans as of June to purchase CMBS, ABS backed by student loans and by loans guaranteed by the Small Business Administration. Up to $100bn of TALF loans could have 5-year maturities.

The Fed said in February it planned to expand the program; Friday's announcement moves TALF along toward that goal. The market in CMBS traditionally serves as a mirror to the residential mortgage-backed securitization space. In essence, RMBS must be doing really well for investors to feel confident in CMBS: when RMBS performance goes up, so does CMBS.

However, recent times show a complete disenchantment with CMBS. RMBS activity dropped greatly during the credit crisis, but never stopped. Not so with CMBS, where the market sees weeks in a row without a single deal in the pipeline, retained or not.

Predictably, the Commercial Mortgage Securities Association, an international trade body that supports the industry, is very pleased with the new bailout terms. “Extending TALF to CMBS with five-year terms is critical to providing liquidity and facilitating lending in the commercial mortgage market,” says CMSA president Christopher Hoeffel. “CMSA has strongly advocated for a term of five years to kickstart investor demand."

“A five-year term is more consistent with the longer-term nature of commercial lending and will provide more flexibility to borrowers as they navigate the current real estate cycle,” he adds.

In a research note out today, analysts at Banc of America Securities are equally supportive. "This is a positive development as non agency RMBS would also benefit from such longer term TALF loans," they write.

For CMBS, the hair cut is higher for loans where the weighted average life of bonds is longer than the term of the loan, they explain. This may suggest haircuts in the RMBS space will be high as there is considerable uncertainty about the WAL and there is potential for dramatic extension especially under loan modification scenarios.

Write to Diana Golobay at diana.golobay@housingwire.com.

Jacob Gaffney contributed to this report.

The long awaited stress test results on the nineteen biggest U.S. banks, slated to for release May 4, will likely remain a mystery until next Thursday at the earliest, according to media reports.

Preliminary results were delivered to banks last week, but the Federal Reserve is reportedly postponing the results as executives debate preliminary findings and any recovery plans with examiners.

The disclosure may potentially send the stock prices of weaker institutions falling. “Everybody understands they’ve got a tiger by the tail here,” said Mark Tenhundfeld, a senior vice president at the American Bankers’ Association, according to a Bloomberg report. “If they don’t let him go gently, there will be a lot of mauling going on.”

The tests began in late February. Regulators required all US bank holding companies with year-end 08 assets exceeding $100bn to participate in the assessment. These 19 institutions collectively hold two-thirds of the assets and more than half the loans in the US banking system, according to the Fed.

More than 150 examiners, supervisors and economists from the Fed, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation studied banks’ potential performance under projected economic expectations and a more adverse outlook with a longer, more severe recession. The point: to determine the capital buffer needed to ensure the firms would remain appropriately capitalized at the end of 2010 if the economy proves weaker than expected.

On April 24, the Federal Reserve detailed the process and methodologies used in the stress tests. In the same report, the Fed said most US banking organizations currently have capital levels in excess of the amounts required to be classified as well capitalized. The Fed warned, however, "losses associated with the deepening recession and financial market turmoil have substantially reduced the capital of some banks."

At least six of the nineteen banks will require additional capital, according to reports quoting people close to the matter. And most of the capital is likely to come from the conversion of preferred shares to common equity. The Wall Street Journal reported earlier in the week, citing people familiar with the situation, that the government told Citigroup (C: 30.87 +1.61%) and Bank of America (BAC: 7.29 -0.14%) it's possible both will need to raise more capital.

Write to Kelly Curran at kelly.curran@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

SPDR KBW Mortgage Finance ETF (KME: 34.1112 0.00%), began trading Thursday making the platform the first exchange-traded fund (ETF) to target mortgage-related equities.

"As the first ETF to invest in the mortgage finance industry, the SPDR KBW Mortgage Finance ETF provides investors with an unmatched opportunity to gain diversified, cost-effective exposure to the real estate finance industry," said Anthony Rochte, senior managing director at State Street Global Advisors. The investment management arm of State Street (STT: 39.06 +0.72%), State Street Global Advisors provides the SPDR suite of ETFs with more than $129.5bn assets under management.

KBW Mortgage Finance tracks a Keefe, Bruyette & Woods-maintained index of 24 mortgage finance companies and provides US investors with access equities in the mortgage finance industry. The ETF traded at $39.64, down 1.8% in mid-morning trading as this story went to press.

Write to Diana Golobay at diana.golobay@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

The Federal Reserve Bank of New York purchased another $59.57bn in gross agency mortgage-backed securities (MBS) this week from government-sponsored entities Freddie Mac (FRE: 0.00 N/A), Fannie Mae (FNM: 0.00 N/A) and Ginnie Mae after last week’s $41.45bn gross purchases, according to a late-Thursday announcement.

The Fed purchased, net of $36.42bn in coupon sales, $23.14bn in agency MBS in the week ending April 22, a decline from last week’s $26.2bn in net purchases. Sales for the week ending April 29 more than doubled from last week's $15.25bn.

The Fed bought a gross $18.1bn from Freddie’s books, $40.96bn from Fannie and $500m off Ginnie’s books this week. The Fed’s purchases this week favored MBS with 30-year maturities and 5.5% coupons, at a $31bn price tag from all agencies. These purchases will hit the Fed's balance book in May. Meanwhile, the Fed also sold a comparable $30.55bn of 30-year 5.5% coupons, but these sales won't settle until June.

See a detailed table of the current week’s purchases and sales.

Since the Fed began listing the settlement months of the transactions — when the purchases and sales should affect the Fed’s balance sheet — weeks ago, a noticeable discrepancy arose on a weekly basis in terms of the settlement months of coupons bought and sold. For example, of the Fed’s hot ticket purchase item last week –30-year 4.5s — a whopping $16.45bn is set to hit the Fed’s balance sheet in June, while the Fed’s only weekly sales of the same coupon — a relatively small $500m — affects the Fed’s April balance sheet.

This week's 30-year 5.5s, however, show a bit of stabilization in terms of the volume of purchases balancing the volume of sales. The $31bn in purchases and $30.55bn in sales may settle month apart, but the Fed is still selling about as much as it had purchased, keeping its month-over-month activity balanced in terms of asset and liability traffic on the Fed's balance sheet.

The Fed began listing sales weeks into the program and settlement months only recently, however, indicating a long history of MBS purchases that outweigh sales. The effect shows on the Fed’s balance sheet, which sits about 140% above its value at the same time last year, according to a balance sheet summary released Thursday. The Fed’s assets shrank by $81.54bn the week ending April 29, bringing the Fed’s consolidated balance sheet to a value of $2.08trn for the week, from $2.17trn the week before. The balance sheet is still up $1.22trn from the year-ago week ended April 30, 2008.

Write to Diana Golobay at diana.golobay@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

Early evidence of at least some relative improvement among securitized subprime loans likely won't matter much to mortgage markets overall, thanks to fast-increasing pain in other sectors of the mortgage market. According to early surveillance data released Friday by Clayton Holdings, Inc., both subprime and Alt-A delinquencies continue to grow, but patterns within overall delinquency trends show just where the pain in the mortgage market really has shifted to.

First, the good news. The subprime credit sector may actually be seeing some pressure ease somewhat, according to Clayton data, which found that the subprime 30-day delinquency rate as a percentage of active balance has actually fallen in the past several months. (Yes, really).

The firm said that for loans it monitors, the U.S. subprime 30-day delinquency rate fell to 5.96% at the end of February, compared to 6.54% in Dec. 2008. Part of that seems to be due to soaring repayments, as one month CPRs (prepayment rates) soared as much as 31% during March, depending on vintage. But the easing of early delinquencies among subprime borrowers could also reflect a seasonal trend, too — for those unversed in mortgage servicing, early delinquencies tend to spike during the holiday season, ostensibly as distracted borrowers miss payments or allocate their money towards holiday spending rather than mortgage payments.

That's pretty much all of the good news.

While early-stage delinquencies among subprime borrowers have been easing in recent months, those subprime borrowers already in trouble are seeing their woes multiply quickly. Clayton's data found that subprime loans in any stage of delinquency rose to 38.0% of active balance by the end of February, up slightly from 36.7% at the end of last year. Increases in late-stage delinquencies and foreclosure starts are more than swamping any decreases in new defaults among subprime borrowers, leading to the aggregate increase in the overall default rate, Clayton noted. In California, for example, subprime 90+ day DQs excluding foreclosures and REO are now touching nearly 12%, roughly double year-ago levels.

Alt-A borrowers don't have nearly as nuanced a story, relative to their subprime brethren. Among Alt-A loans monitored by Clayton, a simple phrase sums up most recent loan performance: from bad to far worse. A full 26% of those Alt-A loans monitored by the firm were in some stage of delinquency at the end of February, up dramatically from one year earlier, numbers that are looking increasingly subprime-like. More pain in this loan category may appear on the horizon soon, too, with the percentage of active Alt-A loans facing rate changes set to spike beginning in October of this year, Clayton's data showed.

Want to see evidence of how rough things really are in Alt-A? Among 2007 Alt-A first liens monitored by Clayton, 33.58% are 60+ days delinquent, up roughly 5 percent from January 2009. And that increase came despite a 2.1% jump in prepayment rates, a 14.89% decrease in roll rates, and a 25% increase in the cure rate. (Think on that for a minute: cures are up, prepays are up, rolls are down — but 60+ day DQs are still rising anyway.)

The data is published in the firm's monthly InFront RMBS report. For more information, please visit http://www.clayton.com.

Write to Paul Jackson at paul.jackson@housingwire.com.

MBIA Insurance — of parent holding company MBIA (MBI: 12.18 +1.50%) — is suing Merrill Lynch over certain "misrepresented" credit default swap (CDS) contracts and related insurance policies.

MBIA asks the New York Supreme Court to rescind — or unmake — the contracts and damages resulting from Merrill's "misrepresentations" and contract breaches. According to the suit, Merrill marketed the CDS contracts to MBIA as part of a strategy to offload billions of dollars in deteriorating subprime residential mortgages. MBIA alleges that Merrill either packaged these bad mortgages into collateralized debt obligations or hedged their own exposure to them through insurer-guaranteed swaps.

MBIA said it insured more than $5.7bn of credit default protection on "super-senior" and "senior" CDO tranches, the credit quality of which the company claims Merrill misrepresented. MBIA said it faces losses on the CDOs to the tune of "several hundred million dollars," although no exact figure was given.

"Although we will honor all legitimate claims by third-party policyholders, in this case Merrill Lynch is both the beneficiary of some of our policies and the party who improperly induced MBIA to issue these policies," CEO Jay Brown said in a media statement. "Consequently, we are asking the court to rescind the contracts with Merrill Lynch and require them to compensate us for our payments to other counterparties."

Write to Diana Golobay at diana.golobay@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

The Federal Reserve may soon make 5-year loans available to commercial mortgage-backed security investors under the Term Asset-Backed Securities Loan Facility (TALF), in an effort to stimulate the real estate market. At least one ratings firm, however, has raised concern lately over a deteriorating CMBS market.

The program currently offers shorter-term 3-year loans so investors can purchase securities backed by car, credit card and other consumer debt. An announcement regarding the expanded loan offering might come sometime today, unnamed sources told the Wall Street Journal.

Officials told the Journal these five-year commitments might make withdrawing money from the financial system difficult for the central bank in coming years, so the Fed has considered ways to offer longer-term loans that become less appealing late in their life cycles.

The CMBS market itself seems to have grown less appealing in recent weeks, according to Standard & Poor’s Ratings Services, which warned in early April of a coming slide in CMBS, as the economic recession appears set to take a bite out of one of the few remaining real estate asset classes to survive much of the turmoil in financial markets worldwide. 

“Since September/October 2008, Standard & Poor’s has witnessed significant deterioration in the credit performance of the CMBS transactions it rates,” said credit analyst James Manzi. “The economic recession combined with the absence of readily accessible financing in the capital markets has, in our opinion, skewed the credit risks related to the performance of CMBS sharply to the downside, and in excess of what we expected at origination or in our prior scenario analysis.”

Write to Diana Golobay at diana.golobay@housingwire.com.