New initiatives designed to get credit markets flowing once again were unveiled by the U.S. Federal Reserve Board on Tuesday.
The Fed announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a new facility that will see the Federal Reserve Bank of New York lend up to US$200 billion to holders of certain AAA-rated asset-backed securities (ABS) backed by newly and recently originated consumer and small business loans.
The New York Fed will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The new facility is intended to help market participants meet the credit needs of households and small businesses by supporting the issuance of ABS collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The U.S. Treasury Department will provide US$20 billion of credit protection to the New York Fed in connection with the TALF.
“New issuance of ABS declined precipitously in September and came to a halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS soared to levels well outside the range of historical experience, reflecting unusually high risk premiums,” the Fed notes. “The ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans. Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.”
Additionally, the Fed said that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises — Fannie Mae, Freddie Mac, and the Federal Home Loan Banks — and mortgage-backed securities backed by Fannie, Freddie, and Ginnie Mae.
Purchases of up to US$100 billion in GSE direct obligations under the program will be conducted with the Fed’s primary dealers through a series of competitive auctions and will begin next week. Purchases of up to US$500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. These purchases are expected to take place over several quarters.
“Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” it says.
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