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WASHINGTON, DC-Earlier this week with little fanfare the Federal Reserve expanded even further acceptable collateral under the Term Asset-Backed Securities Loan Facility: it will now accept real-estate backed bonds that were created before this year. Previously only newly issued CMBS was deemed acceptable collateral under TALF.The Fed is requiring that these bonds are both newly issued and legacy securities and have at least two AAA ratings from DBRS, Fitch Ratings, Moody’s Investors Service, Realpoint or Standard & Poor’s; any rating below AAA from any of these ratings agencies would disqualify it.

As always, the real estate markets are in favor of any expansion of TALF; earlier this month industry applauded when the Fed expanded the acceptable maturity to five years, from three.

Coincidentally, there has been talk of some issuers coming to market with new issue CMBS, either in Q3 or more likely, Q4. The thinking, Dan Gorczycki, managing director of Savills US, tells GlobeSt.com is that the old issues, even those rated at AAA, have too much baggage accompanying them, even to invest in the secondary market. In theory, investors can still buy super seniors at, say, 7%. But they would have to research ever pool to make sure these were truly AAA plus rated securities.

“I think some investors have thrown up their hands on the vintages and are saying, lets just take 9% on a new loan,” he says. The new issues have been speculated to come in at five-year, 9%, in the 70% to 75% LTV range.

Not that anyone believes CMBS will come back in the same robust form of 2007 – or even a shadow of this activity. But, some say, the growing expansion of TALF is bound to be an impetus towards whatever securitization market does eventually form.

“Look, there has been a complete freeze in marketplace in CMBS,” Michael Goldsmith, head of the commercial real estate practice group at BBK, an international business advisory firm, tells GlobeSt.com. “The Fed’s decision to open TALF to CMBS legacy loans is a wise decision because it effectively primes the pump.” If nothing else, he says, it will give securities sitting on banks’ balance sheets a potential outlet to finally trade. “It will also establish a benchmark price for AAA securities. Then we will have a much better understanding what these securities are worth.”

What the Fed did is potentially very significant, Ellen Marshall, co-chair of national law firm Manatt, Phelps & Phillips, LLP’s Banking and Financial Industry practice group, tells GlobeSt.com. “Treasury needs to be thinking about how to assist the regularization of the market, both for the disposition of legacy securities out there and for creating new opportunities for new issues to happen.”

Other industry experts contacted for this article, though, say the twain, the Fed’s expansion of TALF and embryonic CMBS issues, are not likely to meet any time soon.

“I would love to tell you ‘yes, something is going to happen with CMBS’, but I just can’t imagine it unless the real estate market is stabilized by the end of the year,” Jeff Levine, an accounting and auditing partner at Margolin, Winer & Evans, tells GlobeSt.com. More upheaval for the mortgage and commercial real estate finance industry is coming, he says, not the least of which from CMBS loans coming due for refinancing.

Also, the government has yet to convince a majority of investors that TALF is worth participating in, Edward Mermelstein, real estate attorney and founder of Edward Mermelstein & Assoc., tells GlobeSt.com.”There is a huge concern over the government’s requirements, which is resulting in quite a bit of hesitation on the part of investors.”

“There is no sign of a thaw in the CMBS market, and I’d be surprised if a significant number of CMBS deals come to the market later in 2009,” Steven Fleissig, transactional real estate partner with law firm Herrick, Feinstein, tells GlobeSt.com. “I’m not seeing it. I’m not hearing it. I’m not sensing it in any way. I’d love to be wrong on this and would gladly eat these words.

“It’s possible that some trickle of CMBS activity will begin, but my belief is that it will be later than that, very slow to start, and look significantly different from the CMBS deals we got used to seeing,” says Fleissig, who represents lenders and developers. “The market’s appetite to buy the paper is what drives the CMBS market, and there’s no appetite now or, in my opinion, for the forseeable future. When it comes back, it will be underwritten much more conservatively and at much lower loan-to-value ratios.

“The balance-sheet market will come back before the CMBS and even that is more or less stuck in neutral. So I think it’s wildly optimistic to think that CMBS will be back in any meaningful way by the end of this year,” he says.

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