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The Federal Reserve announced that it is making its Term Asset-Backed Securities Loan Facility (TALF) available to finance newly issued commercial mortgage-backed securities (CMBS).

Under this new program, announced on May 1, investors will be eligible to receive low-cost, non-recourse loans, with either three-year or five-year terms, to buy qualifying CMBS.

The five-year term for the loans in question is a significant extension of the three-year term provided for investors to acquire previously authorized securities backed by eligible car debt, credit-card debt and other consumer and small business loans.

In order to qualify as eligible collateral for a TALF loan, the CMBS in question must have been issued after January 1, 2009, be rated not less than the highest investment-grade rating from the required TALF CMBS-eligible rating agencies and be backed by eligible commercial mortgage debt originated on or after July 1, 2008 and secured by properties located in the United States. Each CMBS must evidence an interest in a trust fund consisting of fully-funded, first-priority mortgage loans that are current in payment at the time of securitization. A three-year TALF loan will bear interest at a fixed rate per annum equal to 100 basis points over the three-year Libor swap rate; a five-year TALF loan is expected to bear interest at a fixed rate per annum equal to 100 basis points over the five-year Libor swap rate.

The collateral haircut for each CMBS with an average life of five years or less will be 15 percent, meaning that the Federal Reserve will lend up to 85 percent of the value of the CMBS. For average lives beyond five years, collateral haircuts will increase by one percentage point for each additional year of average life beyond five years. No CMBS may have an average life beyond ten years.

TALF loans are made through the Federal Reserve’s primary dealer network. Investors interested in qualifying for TALF loans must establish an account relationship with a primary dealer and enter into a so-called Customer Agreement that will govern the TALF loan process.

Additional notifications to be issued in the future are expected to clarify the application of TALF to so-called Legacy Securities. Click here to review the Terms and Conditions and here to read Frequently Asked Questions pertaining to the CMBS program.

For more information about this new program, please contact us:

Richard Coll

Rusty Conner

David Krohn

and any member of DLA Piper’s Real Estate practice or Finance practice