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Wednesday, 26 November 2008

After TARP & SARP, now TALF & MALF

An $800bn email from Seeking Alpha editor, R Granby (pictured below): US government unveiled its newest initiative, called TALF, or Term Asset-Backed Securities Loan Facility. The $200bn facility will support consumer finance, including student, auto and credit card loans and loans backed by the Small Business Administration, by lending to investors who hold securities backed by that debt. The facility could eventually be expanded to cover other assets, including mortgage-backed securities. The Treasury will help cover potential Federal Reserve losses by providing $20bn of credit protection from TARP funds. This is the first time the Fed and Treasury have stepped in to finance consumer debt, and the program comes close to creating a government bank. Federal officials defended the move, pointing out that the market for securities backed by consumer debt 'came to a halt' in October, making it almost impossible for millions of Americans to secure affordable financing for everything from college to computers. Along with TALF, the government also introduced a new mortgage program [I shall call MALF - RM] whereby the Federal Reserve will buy up to $100bn of debt issued by GSEs Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Home Loan Banks. According to the statement released by the Fed, "this action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved financial conditions more generally." The announcement of the new programs immediately pushed down rates on 30-year mortgages by as much as 50bp, though it's not clear whether the rates will stay down in the long-term. The initiative also includes up to $500bn in purchases of mortgage-backed securities from Fannie Mae, Freddie Mac and Ginnie Mae.

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