Economic Update – Legacy CMBS Now Under TALF

In a major expansion of the Term Asset
Backed Securities Loan Facility (TALF), the Federal Reserve said on
Tuesday that investors will be able to buy existing securities backed by
commercial real estate loans–so-called “legacy” CMBS. The commercial
real estate industry has been pushing for this for some time, and it
will at last be possible starting in July. The crash of the CMBS market
has created a very large storm on the horizon for commercial real
estate, formed by loans that will need to be refinanced in the coming
months and years with no way to do so, even for relatively healthy
loans. By essentially providing the credit itself, the Fed is hoping
that the new policy will help refinance some of the loans and ameliorate
the storm. Earlier this month, the Fed expanded the program to newly
created (and highly rated) CMBS, but precious few of those are coming on
line. With the expansion, the question becomes, how much of the
billions and billions in CMBS isn’t refinancible under any
circumstances? The homebuilding industry had been hoping for an uptick
in construction activity in April, but the U.S. Department of Commerce
said no dice Tuesday. New home construction dropped 12.8 percent from
March, to an annual pace of 458,000 units. Single-family construction
did see an uptick–2.8 percent to an annual pace of 368,000 units–but
that was offset by a sharp drop in starts for multifamily properties.
Demand for new houses still isn’t there, so builder doldrums is still
fairly much a function of that most basic economic principle, supply vs.
demand. Monday, do-it-yourselfer Lowe’s reported weak but “better than
expected” numbers. Tuesday, its larger rival Home Depot reported
similarly weak numbers as consumers still put off that expensive,
multi-part home rehab project or appliance acquisition in favor of duct
tape and other cut-price home maintenance solutions. Sales for the DIY
retailer’s first quarter were $16.2 billion, down 9.7 percent from the
same period last year, while comparable-store sales, an important retail
metric, were down 10.2 percent. Turnaround for this retail segment is
still “eventually.” During Home Depot’s quarterly conference call on
Tuesday, chairman and CEO Frank Blake put it this way, referring
specifically to his company: “Overall it’s important to emphasize that
most of our markets that are improving versus last year are only showing
a slower rate of decline, not positive comps. Getting to less bad is
not the same as getting to recovery.” Perhaps discouraged by the housing
numbers, the Dow Jones Industrial Average took back some of its Monday
gain on Tuesday, losing a modest 29.2 points, or 0.34 percent, while the
S&P 500 was down 0.17 percent and the Nasdaq lost 0.13 percent.