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.