Fed throws TALF lifeline to commercial real estate

By Alister Bull

WASHINGTON (Reuters) - The U.S. Federal Reserve on Friday threw the battered commercial property sector a lifeline by granting it access to an emergency program set up last year to unlock credit markets frozen by a global financial crisis.

The Fed said its $200 billion Term Asset-Backed Securities Loan Facility, which it has already said may grow to $1 trillion in size, will be opened from June to commercial mortgage-backed securities that were issued in 2009.

The TALF was launched last November as policy-makers fought a financial crisis sparked by the collapse of the U.S. housing market that has inflicted the worst recession in a generation.

"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," it said in a statement.

"CMBS accounted for almost half of all new commercial mortgage originations in 2007," the Fed said.

Risk premiums on commercial mortgage-backed securities rose after the Fed's announcement, with traders disappointed that the expansion did not include older and lower rated assets. As part of a broader government effort to remove bad assets from bank balance sheets, the Treasury has said the TALF will be expanded to cover these so-called "legacy assets", but the timing is still unclear.

Risk premiums on a derivative index of "AAA" rated CMBS climbed about 0.5 percentage point on Friday, to more than 5 percentage points above its interest rate benchmark. The spread has declined from nearly 8 percentage points in March.

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