U.S. Will Extend Lending Program

Officials Move to Spur Commercial Loans

The Federal Reserve and the Treasury Department said Monday that they will extend a key lending program aimed at freeing up credit including loans to build offices, apartment buildings and other types of commercial real estate.

The extension comes as the Term Asset-Backed Loan Facility, or TALF, has so far made little headway in reviving the ailing commercial real estate market, industry officials and analysts said.

According to analysts, the TALF is simply too small to stimulate the lending needed to boost the sector. For now, Obama administration officials have no plans to pour additional federal resources into the effort, said government sources familiar with their thinking.

Though the recession has shown signs of letting up and the housing slump appears to be nearing a bottom, the commercial real estate market remains mired in problems. Rising vacancies and falling rents have left commercial property owners unable to make mortgage payments, and the credit crunch has hampered their ability to roll over their debts, driving some into bankruptcy and forcing others to a sale.

Some analysts worry that a new wave of defaults is looming, which could add grief to the banking sector and cause regional and community banks to fail. Between this year and 2011, $814 billion in commercial real estate loans are expected to mature, according to the research firm Foresight Analytics.

As a result, the Fed and Treasury said they would extend the TALF, which lends money to investors buying highly rated securities backed by consumer, business and commercial real estate loans. When investors buy those securities, lenders can use the proceeds to make additional loans. As of Aug. 12, the program had $29.6 billion in outstanding loans.

The TALF, created last November, was set to wind down by the end of the year. It will now last through March 2010 for newly issued securities backed by consumer and business loans and for existing securities -- created months or years ago -- backed by commercial real estate loans. For newly issued securities backed by commercial real estate loans, the program will run through June 2010.

"Conditions in financial markets have improved considerably in recent months. Nonetheless, the markets for asset-backed securities backed by consumer and business loans and for commercial mortgage-backed securities are still impaired and seem likely to remain so for some time," said a Fed release announcing the extension.

The Fed and Treasury also said they had no plans to open the program up to other types of collateral.

Many lenders have sharply curtailed new commercial mortgages, leaving many developers and construction companies in a bind. The results of a July survey of senior loan officers issued Monday by the Fed showed that 45 percent of banks tightened lending standards for commercial real estate loans, compared with 65 percent in April. However, the percentage of banks reporting weak demand for such loans fell only slightly, to 65 percent.

Over the next few years, developers and construction firms will need to refinance an estimated $3 trillion in commercial real estate debt. Many of these loans were issued during the construction boom earlier in the decade under the mistaken assumption that they would be refinanced on the same generous terms.

Since the credit crisis struck last year, few developers have been able to refinance their debt, endangering distressed and healthy properties alike. For instance, General Growth Properties, which owns Tysons Galleria mall in Northern Virginia, one of the most profitable shopping centers in the nation, filed for bankruptcy in April after it could not roll over its loans.

The problems of the commercial real estate market could also hit lenders, many of them small community banks and regional firms. Thousands of these firms wrote hundreds of billions of dollars worth of mortgages for new dentist offices, shopping malls and grocery stores. During the boom, these loans produced tremendous profits for the lenders, but they also required them to take on big risks because of the size of some of the commercial projects.

Now, a growing number of defaults on those properties is eating away at the capital held by these banks, forcing some to close. Some bank analysts say losses from commercial real estate loans are now the single largest cause of bank failures.

TALF has had some success reviving the market for commercial mortgage-backed securities, with some real estate investment trusts saying they plan to issue new securities later this year. But the larger problem is defaults, said Matthew Anderson, a partner at Foresight Analytics.

"For that end of it -- the end of the market that is experiencing payment problems -- I don't see that TALF is going to have an impact," he said.