The TALF (Term Asset-Backed Securities Loan Facility) Program

The TALF (Term Asset-Backed Securities Loan Facility) Program is designed to provide some much-needed relief to the asset-backed security market following the market crash in 2007-2008. The Federal Reserve will issue asset-backed securities on various forms of loans. Any individual who purchases a TALF security will be eligible for a loan from the Federal Reserve Bank of New York. The loans will be secured against the asset-backed security (ABS). 

Purpose of TALF

The TALF program is a response to the need for increased financing in the ABS market. When the housing market collapsed in late 2008, interest rates on ABS loans soared to record levels. As a result, the credit market funded by ABS collapsed, greatly decreasing the number of loans on the market for use by individuals and businesses. This resulted in a situation where it was very challenging to get a loan, even for an eligible borrower. Without credit, few businesses can expand operations, offer new jobs and drive retail spending. The Fed and the US government needed to address this issue by increasing liquidity on the loan market. The TALF program is an attempt at increasing the number of loans on the market by increasing the relevance of ABS opportunities.

Structure of a TALF Loan

The process starts with a consumer's purchase of an ABS from the government that is backed by a consumer loan, student loan or loan made by the Small Business Administration. The individual holding the ABS can approach the New York Fed and ask for a subsequent loan. The loan is issued in a non-recourse structure. This means the Fed will hold the note to the ABS, and if the borrower cannot pay for any reason, the Fed will keep the ABS in its entirety. 

Benefitting from a TALF Loan

If you purchase an ABS with a high credit rating, you are immediately eligible for the TALF program. The only collateral you must offer in order to secure a loan is the ABS itself. You should note that, since the loan is non-recourse, the entire value of the ABS will be surrendered if you cannot pay. This happens even when you have paid off a large majority of the loan. A default will result in immediate surrender of the ABS to the New York Fed, and you will then be released of obligation to pay the debt. 

Critiques of the TALF Program

Asset-backed securities are historically highly risky investment options. By purchasing an ABS, even if it is a highly rated ABS, you are essentially taking part in the issuance of a loan. You have purchased a portion of a loan, and if the borrower defaults, you will be the one who ends up with a loss. On the whole, though, the program is not designed to benefit day-to-day investors. Most investors in asset-backed securities are institutional. These institutions will take the risk, and the New York Fed will then extend them loans in exchange for agreeing to take this. This creates a situation where systemic losses could again occur if the ABS results in a default. 

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