The Term Asset‐Backed Securities Loan Facility (TALF) is a joint Federal Reserve‐Treasury program that was designed to restart the asset‐backed securitization (ABS) markets that had ground to a virtual standstill during the early months of the financial crisis.
The ABS markets historically have helped to fund a substantial share of credit to consumers and businesses. The consequences of these markets coming to a standstill were many: limited availability of credit to households and businesses of all sizes, an unprecedented widening of interest rate spreads, sharply contracting liquidity in the capital markets and a potential to further weaken U.S. economic activity.
Under the TALF, the Federal Reserve Bank of New York (FRBNY) provided non-recourse funding to any qualified borrower that owned eligible collateral. On fixed days each month, borrowers were allowed to request three-year, or in certain cases, five-year TALF loans. If the borrower does not repay the loan, the FRBNY will enforce its rights to the collateral and sell it to TALF, LLC – a special purpose vehicle (SPV) established specifically to purchase and manage these assets. Treasury provides a subordinated loan to the SPV but does not directly lend to TALF borrowers.
TALF employs several safeguards to protect taxpayers’ interests including:
- Borrowers bear the first loss risk in all securities pledged as collateral for TALF loans due to the substantial haircuts required (borrower’s equity in the securities). Haircuts ranged from five percent to 20 percent based on the quality of the assets. This means that the risk to taxpayers is reduced even further.
- Eligible securities must have received two AAA ratings from the major rating agencies, and none of the major rating agencies can have rated the security below AAA or placed the security on watch for a downgrade.
- Protection is provided by the risk premium included in the TALF loan rates. The interest rate spread provides accumulated excess interest in TALF, LLC as a first loss position.
- Each ABS issuer must use an external auditor to verify that the ABS is TALF eligible. Additional protection is provided by the FRBNY and their collateral monitors who assess the risk associated with this collateral and perform their due diligence.
The maturity date on Treasury’s subordinated loan to TALF, LLC is March 2019. Treasury’s engagement may extend beyond this period if collateral is sold to TALF, LLC, which will require active management of the assets.