During the COVID crisis, many look to Congress for stimulus relief to prevent the downward spiral in the economy. However, Congress is mired with special interests, political jockeying, and general dysfunction.
The CARES Act was a unique display of Congress’ ability to act quickly despite last minute drama. However, future Congressional stimulus appears to be mired in special interest infighting and political sensitivity to avoid terms such as “bail out.” Unlike Congress, the Federal Reserve (“Fed”) has the capacity to provide liquidity to the financial system with little oversight and debate.
During mild liquidity challenges, the Fed traditionally purchases U.S. Treasuries to insert capital into the marketplace with the goal of lowering interest rates. However, during times of crisis, the Fed has extended its purchasing to include Residential Backed Mortgage Securities and Commercial Mortgage Backed Securities (together “MBS”). Up to this point in the COVID crisis the Fed has focused strictly on the purchase of Agency MBS issued by Freddie Mae, Ginnie Mae, Fannie Mae and the like.
The Fed continues to demonstrate its eagerness to inject capital into the system through a variety of means. On April 9, in an unprecedented move the Fed took actions to inject up to another $2.3 trillion in the economy. Unlike MBS purchases which are all government related, the Fed intends to offer loans to a variety of private market participants.
Most notably related to the real estate market, the Fed has brought back the Term Asset-Backed Securities Loan Facility (“TALF”). TALF will provide up to $100 billion in loans to U.S. companies. The collateral for TALF related loans includes asset backed securities ranging from auto, credit cards, equipment, student loans, and commercial mortgages.
For CMBS to qualify under this program, it must have been issued before March 23, 2020.
What is challenging with the TALF facility is that it excludes two commonly used structures for private mortgage debt funds. First, any Single Purpose Vehicle loan where a single borrower owns a single asset are excluded. Additionally, and probably of more impact to the private lending industry, is that collateralized loan obligations (“CLO”) which became very popular in past few years to obtain lower leverage are also excluded from the TALF facility. For a detailed understanding of what is eligible in this facility, the Fed has provided a fact sheet available here.
Therefore, the immediate and direct impact of this facility will be quite limited for private mortgage debt funds. However, the Fed’s desire to continue to inject liquidity into the marketplace is a positive sign for the real estate market. Most private debt funds rely to some degree on an efficient capital markets system and this period of volatility has effectively brought private debt mortgage loan origination to a screeching halt.
In addition to TALF, other notable Fed facilities include:
- Enhancing the operational capacity of the Small Business Administration’s Paycheck Protection Program (PPP) by offering increased liquidity to qualifying banks via term financing backed by PPP loans to small businesses. The PPP offers loans to small businesses seeking to retain employees amid government mandated closures to stop the spread of COVID-19. The Paycheck Protection Program Liquidity Facility will offer credit to banks that are eligible for the origination of PPP loans.
- Providing credit flow to small and mid-sized business entities through the acquisition of nearly $600 billion in loans via the Main Street Lending Program. The Treasury, utilizing capital provided by the recently enacted CARES Act, will offer $75 billion in equity to the PPPLF.
- Assist state and local governmental entities in managing cash flow impediments resulting from the COVID-19 outbreak by creating a Municipal Liquidity Facility that will provide up to $500 billion in loans to states and municipalities. The Federal Reserve will receive up to $35 billion in credit protection from the Treasury as part of the Municipal Liquidity Facility project.
These drastic moves by the Fed continue to demonstrate an active and engaged monetary policy which cumulatively will help speed up a necessary recovery. While the news and many in our society look to Congress and their power of the purse, it appears that real action will continue to occur behind the scenes with the Fed and their unparalleled spending power.
