With banks limiting the availability of auto, student and other consumer loans, the US Federal Reserve said on Monday it would extend a program intended to help spur more lending at low rates.
The program is set up to provide up to US$1 trillion in low-cost financing to investors to buy securities backed by consumer and commercial loans.
But private economists say the program, Term Asset-Backed Securities Loan Facility (TALF), has yet to help consumers and businesses struggling to get credit.
The program, originally set to expire at the end of the year, has two parts: The part aimed at boosting consumer and business lending is being extended through March, while the part geared toward boosting new commercial real estate lending will run through June because of the extra time typically needed for such deals. Delinquency rates on such loans have soared as companies have downsized or closed their doors, the Fed says.
TALF was created in March and the government said the program has the potential to generate up to US$1 trillion in lending. But participation has been scant: As last Wednesday, the value of loans outstanding stood at just US$29.6 billion.
Many economists said the market for securities backed by consumer and business loans has improved only slightly with TALF. Still, they say the Fed should continue the effort.
“Asset-backed securities are a key way for investors to supply credit to US households and businesses, and that method was essentially shut down when the financial crisis hit last year,” said Mark Zandi, chief economist at Moody’s Economy.com. “If we can’t get the credit markets restarted, the economy won’t be able to recover.”
The Fed on Monday also extended until March 31 TALF loans that support existing commercial mortgage-backed securities. Businesses use these loans to finance such activities as buying shopping centers and other real estate. The Fed extended the program for new loans in this category until June 30.
Economists said any help for commercial real estate is vital because of the rising defaults. Small and regional banks face the greatest risk of losses from commercial real estate loans. Federal regulators on Friday announced the biggest bank failure this year, the collapse of Montgomery, Alabama-based real estate lender Colonial BancGroup Inc.
“Many smaller banks are still in deep trouble,” Zandi said.
Jeffrey DeBoer, president of the Real Estate Roundtable, praised the Fed’s decision, saying the action “sends a clear signal to markets that the Fed and the Treasury understand the gravity of the problem in commercial real estate credit markets.”
Among the problems that have held back TALF are rule changes and fear among participants that they might become ensnared in an anti-bailout backlash from the public and Congress.
In a joint statement with the Treasury, the Fed said even though TALF is being extended, the two agencies decided against expanding it to allow other types of collateral to be used for loans. The agencies said this decision could be reversed if market conditions do not improve in coming months.
The Fed last week delivered a vote of confidence in the economy, saying the downturn appeared to be “leveling out.”
Fed officials also said they would slow the pace of a program to buy US$300 billion worth of Treasury securities, an effort aimed at keeping mortgage rates affordable. The central bank said it planned to shut down this program at the end of October, the first program it has moved to close since the credit crisis first hit.
Monday’s announcement was a signal that the Fed wants financial markets to know it’s monitoring emergency credit programs.
“This action reflects the Fed’s view that the economy is stabilizing, but it is far from a durable recovery,” said Sal Guatieri, an economist at BMO Capital Markets.
Also on Monday, the Fed said most banks expect their lending to remain tight through the second half of next year, though mortgage standards are loosening a bit.
The Fed’s latest survey of loan officers found that about 20 percent of US banks tightened their lending standards on prime home mortgages in the second quarter, down from about 75 percent a year ago. Around 35 percent of US banks reported tightening their lending standards for credit cards, down from around 65 percent a year ago.
Joseph LaVorgna, chief US economist at Deutsche Bank Securities, said “the credit freeze is at least moving in the direction of a thaw.”
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