In a speech on the Federal Reserve exit strategy to the House of Representatives Committee on Financial Services, chairman Ben Bernanke noted that the government-led credit provision, the Term Asset-Backed Securities Loan Facility (TALF) is reaching its end this month. The exception to this deadline, however is newly issued commercial mortgage-backed securities (CMBS), and loans backed by newly issued CMBS. These will get an extra three months. In a footnote accompanying the published transcript of the speech, the chairman's comments are given justification:
The TALF extends three- and five-year loans, which will remain outstanding after the facility closes for new loans. The later scheduled closing of the CMBS portion of the facility reflects the Board's assessment that conditions in that sector remain highly stressed, as well as the fact that CMBS securitizations are more complex and take longer to arrange than other types
According to Robert O'Brien, US Real Estate Leader at consultancy firm Deloitte, this approach mirrors the current "pretend and extend" strategy surrounding the larger commercial real estate industry. There appears to be no better option for the moment, O'Brien adds, as "many commercial real estate (CRE) owners will likely continue to struggle with debt maturity in 2010 and beyond." In an environment of low interest rates, it makes sense to extend a loan for three or four more years in order to give enough time for the capital markets and investor appetite to return, along with a more robust job market, he adds. In the case of CMBS, the assets remain off-books for issuers, who remain cautious about bringing such real estate back into the mix considering many of the properties aren't making rental money and require servicing attention. O'Brien, in his 2010 Industry Outlook, states that the Federal Deposit Insurance Corp. (FDIC) received guidance from the government on how to work with borrowers to avoid commercial foreclosures. Nonetheless, foreclosures in CRE will see an uptick in 2010, the report adds, as investors continue to wait on the sidelines until a bottom to the market is definitively reached. Write to Jacob Gaffney.