Alphabet Soup - The Acronyms of Relief For the American Economy
For many in the commercial real estate markets the question has been where are all the deals? Banks, investors, and developers are clearly under duress, yet few truly distressed deals have come to market. According to a recent report from a major investment brokerage firm, sales of commercial assets were down 70 percent from one year earlier by the end of the first quarter in 2009. The combined influences of banks attempting to postpone foreclosures to preserve capital and the proliferation of complex securitized loans have conspired to stall markets and leave most wondering what next?
On the residential side of the equation the loss of consumer confidence, jobs, and the disappearance of available loans halted an overheated market that ultimately left homeowners upside down on their mortgage and speculative investors holding a bag of goods no one wanted to own.
Today we find glimmers of hope in the residential marketplace. Mortgages have again become available to the low and middle markets of homes (in Southern California that translates to homes priced from $100,000 - $750,000), REO properties have come to market at prices that allow many, previously priced out, to return in force. Further, private sellers have found themselves willing to narrow the gap between expectations and what the market will actually pay. Typically lagging economic trends by 6-9 months the commercial markets are expected to find their stride once the overall economy begins to show signs of life. Most "experts" now agree that will ultimately come by fourth quarter of 2009 or first quarter 2010. Still, facing many variables with unclear direction, there is much to sort out on that end.
To address the financial mess, back stop the slide of temporary shortcomings, and to "grease the gears" of economic growth the Federal Government has introduced stimulus packages with unprecedented reach. The $450 billion in relief funds initially established under the Bush Administration, coined TARP and TALF, were ultimately met with an additional $787 billion termed the ARRA. Obama's recovery plan includes many other confusing acronyms including a PPIP to help address illiquidity and pricing difficulties facing ABS markets including CMBS and RMBS, a move that left some wondering why we don't just use the RTC ideas of the 1990's to meet the challenge head on.
Ultimately the alphabet soup has left most Americans wondering what in the heck everyone is talking about? So let's shed some light on the new terms and attempt to explain their reach and purpose:
* ABS - Asset Backed Securities. This is the basic stitch to this whole ensemble. When banks issues consumers (you and me) loans for commercial real estate, homes, student loans, on credit cards, etc. they pool them together in large groups, rate them according to risk of not being paid back, divide them into shares or stock, and then sell them to investors. When consumers make payments on their loans as agreed investors of these stocks receive dividends on their investment. Additionally, when the value of the assets securing these loans increase the risk of loan repayment goes down and the value of each stock share goes up. Conversely, when consumers stop making payments on loans or when the value of the assets (homes, etc) become less than what the consumer owes, the dividends stop coming to the investor and ultimately the value of the stock share becomes worthless...
* CMBS - Commercial Mortgage Backed Securities. These securities are a subset of the ABS and work in the same way I've mentioned above. Specifically, these securities are secured by commercial real estate such as retail centers, office buildings, apartment buildings, etc.
* RMBS - Residential Mortgage Backed Securities. Again a subset of the ABS group, these securities are secured by residential mortgages both single family homes and condominium units owned by and occupied by the homeowner.
* TAF - Term Action Facility. In addition to establishing a credit facility for securities dealers, allowing them to borrow directly from the central bank. The Bush Administration, in December of 2007, established the TAF to enable depository institutions (commercial banks) to obtain credit through a bidding process. This helped ailing banks find capital when the flow of money came to a stand still.
* TARP - Troubled Assets Relief Program. The one we're all most familiar with, TARP, was initially passed in October 2008 and intended to raise capital within the federal government for the purpose of buying "toxic assets" from troubled financial institutions. However, nearly all of the initial $350 billion dollars was used to recapitalize banks in exchange for preferred equity investments (stock). Much to the ire of the banks that accepted the handouts, this program is responsible for all the restrictions on executive pay, bonuses, etc. It is also the money banks are hoping to repay now to avoid further government oversight.
* ARRA - American Recovery and Reinvestment Act. Often referred to as the Obama Bail Out Plan, ARRA provides $787 billion in stimulus, including $288 billion in tax breaks aimed at consumers and small business. The intent is to generate demand via consumption. These are also the funds that states are requesting for infrastructure projects, science, job creation, health care, education and training, and energy related projects.
* TALF - Term Asset-Backed Loan Facility. This will allow the Federal Reserve to loan up to $1 trillion in money to private investors and financial institutions in efforts to restart the market for newly issued asset backed securities (ABS, see above). These securities will include loans on assets such as student loans, credit card loans, and small business loans, residential and commercial real estate.
* PPIP - Public Private Investment Program. Aimed at clearing existing real estate related loans and securities from the balance sheets of financial institutions, the program hopes to encourage private investment with government guarantees and cheap leverage facilities provided through the US Treasury. If successful the program will jump start investment in the "toxic assets" initially targeted with TARP funds and create pricing mechanism for these securities. Once a valuation procedure is established it should encourage private capital to reemerge into the marketplace and help re-start the stalled ABS market.
* LLP - Legacy Loan Programs. "Legacy" for assets already on the books at financial institutions, LLP combines FDIC guarantees on debt financing along with equity from private investors and the US Treasury to support the purchase of existing troubled loans from insured depository institutions; these are the commercial banks like Bank of America, Wells Fargo, et al that take deposits from everyday Americans. It is one of the two programs under PPIP.
* LSP - Legacy Securities Program. Again termed "Legacy" to signify existing assets, the LSP is the second program under PPIP which addresses the loans that were securitized and sold as ABS on the secondary market. This program will combine financing from the Federal Reserve and TALF with equity from the private sector and the US Treasury to buy troubled securities like CMBS and RMBS.
* RTC - Resolution Trust Corporation. No longer in existence nor part of the current bailout programs on the table, the RTC is often referred to by professionals and the media to compare methods used in the last real estate crisis of the 1990's. The RTC was a federally chartered asset management company created to liquidate the real estate assets foreclosed upon by failed Thrifts and S&L's declared insolvent during the Savings and Loan Crisis of the 1980's. Simply put the RTC brokered deals between failed institutions and the private investment companies that ultimately purchased the assets.
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