Yesterday, we highlighted yet another indication that one of two parts of the infamous Public Private Investment Partnership, the so called Legacy Loans Program, was being delayed, possibly on a permanent basis (or more likely, it will be launched eventually to save bureaucratic face and have weak to non-existent take-up). Its evil twin, the program for securities, was to have been operational as of May 1. The target start date has been pushed back to July.
Another program, the TALF, or Term Asset Backed Securities Lending Program, may also be in the process of being curtailed. The TALF was envisioned as a way to restart the securitization market by letting investors borrow on a non-recourse basis against newly issued AAA asset backed securities, from asset pools consisting of credit card receivables, student loan, auto loans, SBA loans. The TALF was expanded from its original $200 billion size to $1 trillion, and would include certain types of commercial mortgage paper. The Fed also flagged residential mortgage securities as “an area of possible expansion.”.
Since then, a couple of things have happened. First, the Fed appears to be pulling back on the residential mortgage idea. From Bloomberg (hat tip DoctoRx):
The Federal Reserve may not start lending against residential mortgage-backed securities under its Term Asset-Backed Securities Loan Facility, Federal Reserve Bank of New York President William Dudley indicated.
“We’re still in the process of assessing whether a legacy RMBS program is feasible, and if it were feasible, whether it would be significant enough to make a major impact,” Dudley said….
His comments add to signs that Treasury Secretary Timothy Geithner’s Public-Private Investment Program to boost debt prices and rid banks of devalued assets to expand lending is stalling, after helping to spark a rally in stocks and bonds….
Responding to questions after a speech at the conference, Dudley said each home-loan security is different and must be separately evaluated for the size of the haircut that should be applied, so “there’s a huge administrative hurdle” to expanding the TALF to the bonds….
Last month, the Fed’s program to finance commercial- mortgage bonds was potentially hampered by Standard & Poor’s saying it may downgrade many AAA securities, rendering them ineligible under the central bank’s rules. As much as 90 percent of so-called super senior commercial-mortgage bonds sold in 2007 may be affected as the ratings firm changes how it assesses the debt, New York-based S&P said…..
The TALF and PPIP plans contributed to a rally among many types of home-loan bonds. Typical prices for the most-senior prime-jumbo securities jumped to about 83 cents on the dollar on May 14, from about 63 cents March 19, before steadying, according to Barclays Capital. Similar bonds backed by Alt-A loans with a few years of fixed rates rose to 45 cents, from 35 cents, according to the bank’s reports. Alt-A mortgages fall between prime and subprime in terms of expected defaults.
“Just the announcement of legacy RMBS being included in TALF has already had a major impact,” Roger Lavan, a portfolio manager in New York at Stone Harbor Investment Partners LLP, a fixed-income asset manager, said in an e-mail today. “Not including legacy RMBS in TALF would be a big mistake.”
Another factoid that Bloomberg failed to mention: participation to date is underwhelming, with only $30 billion uptake so far.
Many commentators chose to focus on Dudley’s speech, in which he defended the use of AAA ratings as the basis for determining eligibility for the program (the argument being that it is safe). But as insulting to the intelligence as it is to hear him say that, this has been the program’s design from the get-go.