Monthly Report on Credit and Liquidity Programs
and the Balance Sheet

Other Lending Facilities: Term Asset-Backed Securities Loan Facility (TALF)

Recent Developments

• Investor interest in TALF financing has increased recently.
• May subscriptions supported primary issuance of eight ABS deals worth a total of about $13.6 billion, of which $10.6 billion was financed through the TALF.
• The Federal Reserve recently announced a number of enhancements to the TALF program, including the introduction of new interest rate schedules applicable to borrowings against certain ABS with relatively short maturities, additions to the list of TALF-eligible securities, including commercial mortgage-backed securities (CMBS) and securities backed by insurance premium finance loans, and the authorization of five-year loans for certain classes of securities.
• Most recently, the Federal Reserve announced the inclusion of "legacy" CMBS--previously issued CMBS--to the list of TALF-eligible securities.
• June 2009 subscriptions supported primary issuance of 13 ABS deals worth a total of about $16.4 billion, of which approximately $11 billion was financed through the TALF.

Background

On November 25, 2008, the Federal Reserve announced the creation of the TALF under section 13(3) of the Federal Reserve Act. The TALF is a funding facility under which the FRBNY extends credit with a term of up to five years to holders of eligible asset-backed securities (ABS). The TALF is intended to assist financial markets in accommodating the credit needs of consumers and businesses of all sizes by facilitating the issuance of ABS collateralized by a variety of consumer and business loans; it is also intended to improve the market conditions for ABS more generally.

Table 20. TALF: Number of Borrowers and Loans Outstanding
As of May 27, 2009

Eligible collateral initially included U.S. dollar-denominated ABS that (1) are backed by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA) and (2) have a credit rating in the highest investment-grade rating category from two or more approved rating agencies and do not have a credit rating below the highest investment-grade rating category from a major rating agency. The loans provided through the TALF are non-recourse loans; the Federal Reserve has rights only to the collateral securing the loan in the event that the borrower elects not to repay. Borrowers commit their own risk capital in the form of "haircuts" against the collateral, which serve as the borrower's equity in the transaction and act as a buffer for absorbing any decline in the collateral's value in the event the loan is not repaid. The U.S. Treasury is providing protection against losses of up to $20 billion to the FRBNY using funds authorized under the Troubled Assets Relief Program (TARP). The loan from the FRBNY is senior to the TARP funds. Thus, the TARP funds serve as a "first loss" position in the disposition special-purpose vehicle in the event the borrower's haircut does not fully absorb the decline in the collateral's value.

Table 21. TALF Collateral by Underlying Credit Exposure
As of May 27, 2009

Table 22. TALF Collateral by Rating
As of May 27, 2009

On February 10, 2009, the Federal Reserve Board announced that it would consider expanding the size of the TALF to as much as $1 trillion and potentially broaden the eligible collateral to encompass other types of newly issued AAA-rated asset-backed securities, such as ABS backed by commercial mortgages or private-label (non-agency) ABS backed by residential mortgages. Any expansion of the TALF would be supported by the Treasury providing additional funds from the TARP.

On March 19, the Federal Reserve Board announced that starting in April, the set of eligible collateral for TALF loans was being expanded to include ABS backed by loans or leases related to business equipment, leases of vehicle fleets, floorplan loans, and mortgage servicing advances.

On March 23, the Federal Reserve and the Treasury announced that they were planning on expanding the list of eligible collateral for TALF loans to include previously issued securities--so-called "legacy securities"--as a complement to the Treasury's Public Private Investment Program. Eligible securities are expected to include certain non-agency residential mortgage-backed securities (RMBS) that were originally rated AAA when issued and outstanding commercial mortgage-backed securities and ABS that are rated AAA.

On May 1, the Federal Reserve announced that, starting in June 2009, newly issued CMBS and securities backed by insurance premium finance loans would be eligible collateral under the TALF. The Federal Reserve also authorized TALF loans with maturities of five years, available for the June funding, to finance purchases of CMBS, ABS backed by student loans, and ABS backed by loans guaranteed by the Small Business Administration. The Federal Reserve indicated that up to $100 billion of TALF loans could have five-year maturities and that some of the interest on collateral financed with a five-year loan may be diverted toward an accelerated repayment of the loan, especially in the fourth and fifth years.

On May 19, the Federal Reserve announced that, starting in July 2009, certain high-quality CMBS issued before January 1, 2009 (legacy CMBS) would become eligible collateral under the TALF. The Federal Reserve indicated that eligible newly issued and legacy CMBS must have at least two AAA ratings from a list of approved ratings agencies--DBRS, Fitch, Moody's Investors Service, Realpoint, or Standard & Poor's--and must not have a rating below AAA from any of these rating agencies. More broadly, the Federal Reserve announced that it was formalizing procedures for determining the set of rating agencies whose ratings would be accepted for various types of eligible collateral in the Federal Reserve's credit programs.

Collateral and Risk Management

Under the TALF, the FRBNY lends on a non-recourse basis to holders of certain asset-backed securities (ABS) backed by consumer, business, and commercial mortgage loans. Eligible collateral for the TALF includes U.S. dollar-denominated ABS that (1) have a long-term credit rating in the highest investment-grade rating category (for example, AAA) from two or more rating agencies and (2) do not have a long-term credit rating below the highest investment-grade rating category from a single rating agency. Eligible small-business-loan ABS also includes U.S. dollar-denominated cash ABS for which all of the underlying credit exposures are fully guaranteed as to principal and interest by the full faith and credit of the U.S. government. All or substantially all of the credit exposures underlying eligible ABS must be exposures to U.S.-domiciled obligors or with respect to real property located in the United States or its territories. The underlying credit exposures of eligible ABS must be student loans, auto loans, credit card loans, loans or leases relating to business equipment, leases of vehicle fleets, floor plan loans, mortgage servicing advances, insurance premium finance loans, commercial mortgages, and loans guaranteed by the SBA. Except for ABS for which the underlying credit exposures are SBA-guaranteed loans, eligible newly issued ABS must be issued on or after January 1, 2009. Eligible legacy CMBS must be issued before January 1, 2009, must be senior in payment priority to all other interests in the underlying pool of commercial mortgages, and must meet certain other criteria designed to protect the Federal Reserve and the Treasury from credit risk. In almost all cases, eligible collateral for a particular borrower must not be backed by loans originated or securitized by the borrower or by an affiliate of the borrower. The FRBNY's loan will be secured by the ABS collateral, with the FRBNY lending an amount equal to the market value of the ABS less a "haircut." The Federal Reserve has set initial haircuts for each type of eligible collateral to reflect an assessment of the riskiness and maturity of the various types of eligible ABS. In addition, the U.S. Treasury Department--under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008--will provide $20 billion of credit protection to the FRBNY in connection with the TALF.

Table 23. Issuers of Securities that Collateralize Outstanding TALF Loans
As of May 27, 2009

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