The Fed Seizes Control of Entire U.S. Bond Market!
The Federal Reserve on Thursday took additional actions to provide up to $2.3 trillion in loans to support the economy.This funding will assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus pandemic.
“Our country’s highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus,” said Federal Reserve Board Chair Jerome H. Powell. “The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible.”
The Federal Reserve’s role is guided by its mandate from Congress to promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system. In support of these goals, the Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit in the economy.
The actions the Federal Reserve is taking today to support employers of all sizes and communities across the country will:
- Bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP) by supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value;
- Ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program. The Department of the Treasury, using funding from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) will provide $75 billion in equity to the facility;
- Increase the flow of credit to households and businesses through capital markets, by expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) as well as the Term Asset-Backed Securities Loan Facility (TALF). These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury; and
- Help state and local governments manage cash flow stresses caused by the coronavirus pandemic by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities. The Treasury will provide $35 billion of credit protection to the Federal Reserve for the Municipal Liquidity Facility using funds appropriated by the CARES Act.
In addition, on April 9, 2020, the Federal Reserve announced additional measures to support the economy amounting to as much as $2.3 trillion in liquidity. Among their actions, the Term Asset-Backed Securities Loan Facility (TALF) will now include legacy commercial mortgage-backed securities (CMBS) as eligible collateral. Eligible CMBS securities must have been issued prior to March 23, 2020, while securities related to other asset classes are only eligible if they were issued after this date.
TALF Specifics for CRE
The TALF term sheet specifies the following for the commercial and multifamily real estate loan/securities markets:
The underlying credit exposures for CMBS must be to real property located in the United States or one of its territories;
CMBS securities related to single-asset single-borrower (SASB) and commercial real estate collateralized loan obligations (CRE CLOs) are not eligible at this time.
TALF provides three-year loans to investors of CMBS and other eligible collateral. Haircuts and other terms can be found on the Fed’s website.
Mortgage REITs were pleased by the news!!
But remember the old proverb, “There’s many a slip ‘twixt the cup and the lip.” Or “Don’t count your chickens before they hatch.”