What is TALF and How Does it Affect You?

If the economic recovery underway is to have a chance to take hold, consumer credit needs to return to normal levels. At the heart of this segment of credit are student, auto and credit card loans as well as loans guaranteed by the Small Business Administration. But a recent Federal Reserve survey of loan officers revealed lending by banks is expected to remain tight through mid-2010 so there needs to be something to revive borrower activity. That is the purpose of the Term Asset-Backed Securities Loan Facility, commonly known as the TALF program.

TALF was created to address the needs of individuals and small businesses by supporting the distribution of asset-backed securities, where loans secured by the two groups of borrowers serve as collateral. Traditionally, the securities have supported a large share of those loans. Left unaided, the markets could sharply trim the amount of credit that is available. Through the program, investors and banks can use money made available to buy securities issued at interest rate spreads that are closer to a normal range.

Under TALF, the Federal Reserve Bank of New York will lend up to $200 billion to holders of certain AAA-rated securities. The bank will lend an amount nearly equal to the market value of the securities and be secured at all times. Through the Troubled Assets Relief Program of the Emergency Economic Stabilization Act of 2008, the U.S. Treasury Department provides credit protection to the bank.

The program began in November 2008 to bolster consumer spending as part of the larger recovery effort. Under recent extensions, new securities can be issued through the end of the first quarter of 2010. Also, commercial mortgage-backed securities can be issued through June 2010 because those types of deals can take much longer to arrange. The Fed had received pressure to help the crippled commercial real estate sector, which also was hit hard by the recession.

Investors already have purchased eligible asset-backed securities sold by companies such as American Express, Bank of America, General Electric, and Ford Motor. Though Fed financing for the full amount of the securities was available, more than half of the bonds were bought directly by investors without the additional support. Decreased dependence on the Fed to buy the securities is a sign that markets are stabilizing, which can lead to the emergency measures being stopped. Although Fed and U.S. Treasury officials have said there will be no further extensions, they added that they would reconsider if conditions change.

Besides the tight credit markets that have existed, standing in the way of consumer spending on autos and other goods returning to regular patterns is an unemployment rate that has constantly increased as personal wealth has decreased. Because this type of spending accounts for two-thirds of the U.S. gross domestic product, aid in this sector is essential.