Finance & Business World

A Federal Reserve official said the central bank faces challenges in expanding its Term Asset-Backed Securities Lending Facility to residential mortgage-backed securities, a key facet of the U.S. plan to boost prices and rid banks of devalued bonds to increase lending.

“The most challenging element of the expansion to RMBS is making sure that we’re doing the proper credit analysis around the risks that we might be exposing ourselves to,” Hayley Boesky, a vice president and director of market analysis at the Federal Reserve Bank of New York, said at a conference in New York yesterday hosted by the American Securitization Forum.

The Fed, which is counting on TALF to help curb the longest U.S. recession since the Great Depression, this week announced rules for using older commercial-mortgage bonds to borrow from it, the first expansion of the program past newly issued securities.

The Fed will find it “much more challenging” to protect itself against losses on home-loan bonds because of their “heterogeneous nature,” Boesky said. The central bank plans to hire “collateral managers” to analyze the debt to help it get “comfortable” with determining how much capital investors will be required to put up when getting loans, she said.

Under Treasury Secretary Tim Geithner’s Public-Private Investment Program announced in March, funds run by private managers buying so-called legacy securities may be able to supplement Treasury co-investments and loans with additional TALF financing.

‘We’re Committed’

TALF loans may also be available to other investors as the government seeks to boost prices for the almost $2 trillion of U.S. home-loan bonds without government backing to free banks and funds to create new credit.

“We’re committed to making it happen, our hope is it will happen,” Boesky said in a later interview. “As you know, PPIP for legacy assets uses TALF. But there’s nothing more I can say about the certainty of it happening or when.”

An expansion of the TALF to home-loan bonds may also require further concessions on the length of the loans by the Fed, which relented to investor requests and is offering commercial-mortgage-bond financing of as long as five years.

Investors may seek loans of seven years or longer as government efforts to have more residential mortgages modified to stem foreclosures lengthens the average lives of securities, Ralph Daloisio, the member-elected chairman of the American Securitization Forum trade group and a managing director in New York at Paris-based bank Natixis SA, said in an interview.

Seeing a Success

The Fed sees the TALF as successful so far as it has boosted creation of asset-backed securities already eligible such as credit-card bonds, and driven down yields relative to benchmarks on a range of securitized debt, which had accounted for about 60 percent of lending in recent years before issuance dried up late last year, Boesky said during her presentation health insurance quote.

TALF has helped boost appetite in part by ending a cycle in which buyers of new bonds saw them soon drop in value, John Di Paolo, a vice president at Newark, New Jersey-based Prudential Financial Inc.’s fixed-income-management unit, said during a panel discussion.

The “outlet” has given Ford Motor Co., which issued $3 billion of TALF-eligible debt, more “confidence” to continue lending, said Matt Stovcsik, a securitization manager at the Dearborn, Michigan-based automaker.

Hedge Funds Buy

Asset-backed securities sales totaled $8.3 billion in March when TALF was begun, then tumbled to $2.9 billion in April, before climbing to $13.6 billion this month.

After pension funds and insurers represented the bulk of buyers in the first two months, hedge funds, the “most nervous investors about the political fallout,” took part this month, said Ish McLaughlin, managing director of the investment-,grade syndicate at New York-based Citigroup Inc.

Still, “we have not seen the dozens and dozens of investors who asked all the questions in December, January and February about this facility show up yet,” he said.

TALF has helped boost interest in outstanding asset-backed bonds, partly because new sales help investors better gauge demand and appropriate yields, said Gyan Sinha, a portfolio manager at KLS Diversified Asset Management LP.

Spreads on AAA bonds of credit-card and auto debt have narrowed by as much as 4.4 percentage points since November, JPMorgan Chase & Co. data show. Card securities are trading at about 1.4 percentage points more than benchmarks.

A Goal of Guidance

The Fed is “very committed to coming out with guidance” to enable the creation of special-purpose vehicles that would borrow from TALF, allowing investors who can’t use leverage to participate by buying shares, Boesky said. Hurdles relate to ensuring the eligibility of end investors and dealers’ “know- your-customer” regulations, she said.

Boesky said the Fed may be unable to extend TALF past year- end, to allow investors to assume loans as they buy bonds from current users, as Sinha suggested was needed, or to grant more time for commercial-mortgage programs, as McLaughlin said would make sense because they haven’t yet begun.

The Fed is only able to offer TALF under an expansion of its powers allowed during market crises, “so it’s going to be a legal question,” Boesky said.

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