Eligible collateral for a TALF loan will include U.S. dollar-denominated, cash (that is, not synthetic) commercial mortgage-backed pass-through securities (each a “CMBS”) issued on or after January 1, 2009 as to which all of the following conditions are satisfied as of its date of issuance (except as the context otherwise requires).
- Assets: The assets underlying the CMBS must satisfy the conditions described under “Qualifying Assets” below.
- Pooling and Servicing Agreements: The pooling and servicing agreement and other agreements governing the issuance of the CMBS and the servicing of its assets must satisfy the conditions described under “Pooling and Servicing Agreements” below.
- Current Ratings: As of the TALF loan closing date, the CMBS must have a credit rating in the highest long-term investment-grade rating category from the required number of TALF CMBS-eligible rating agencies and must not have a credit rating below the highest investment-grade rating category from any TALF CMBS-eligible rating agency. Eligible collateral will not include a CMBS that obtains such credit ratings based on the benefit of a third-party guarantee or a CMBS that a TALF CMBS-eligible rating agency has placed on review or watch for downgrade. See the “Frequently Asked Questions for CMBS” for further information regarding TALF CMBS-eligible rating agencies and the ratings conditions that must be satisfied for a CMBS to be eligible collateral.
- Payment Terms: The CMBS must entitle its holders to payments of principal and interest (that is, must not be an interest-only or principal-only security). The CMBS must bear interest at a pass-through rate that is fixed or based on the weighted average of the underlying fixed mortgage rates. The CMBS must not be junior to other securities with claims on the same pool of loans.
- Issuer: The issuer of the CMBS must not be an agency or instrumentality of the United States or a
- Settlement: Each CMBS must be cleared through the Depository Trust Company.
- Asset Types: Each CMBS must evidence an interest in a trust fund consisting of fully-funded, first-priority mortgage loans that are current in payment at the time of securitization, and not other CMBS, other securities or interest rate swap or cap instruments or other hedging instruments. A participation or other ownership interest in such a loan will be considered a mortgage loan and not a CMBS or other security if, following a loan default, the ownership interest is senior to or pari passu with all other interests in the same loan in right of payment of principal and interest. All mortgage loans must be fixed-rate loans. No mortgage loan may provide for interest-only payments during any part of its remaining term.
- Property Types: The security for each mortgage loan must include a mortgage or similar instrument on a fee or leasehold interest in one or more income-generating commercial properties. Each property must be located in the United States or one of its territories.
- Origination Dates: All mortgage loans must have been originated on or after July 1, 2008.
- In-Place Underwriting: All mortgage loans must have been underwritten or re-underwritten recently prior to the issuance of the CMBS, generally on the basis of
then-current in-place, stabilized and recurring net operating income and then-current property appraisals.
Pooling and Servicing Agreements
The pooling and servicing agreement and other agreements governing the issuance of the CMBS and the servicing of its assets must contain provisions to the following effects.
If the class of the CMBS is one of two or more time-tranched classes of the same distribution priority, distributions of principal must be made on a pro rata basis to all such classes once the credit support is reduced to zero as a result of both actual realized losses and “appraisal reduction amounts”.
- Control over the servicing of the assets, whether through approval, consultation or servicer appointment rights, must not be held by investors in a subordinate class of CMBS once the principal balance of that class is reduced to less than 25% of its initial principal balance as a result of both actual realized losses and “appraisal reduction amounts”.
- A post-securitization property appraisal may not be recognized for any purpose under such agreements if the appraisal was obtained at the demand or request of any person other than the servicer for the related mortgage loan or the trustee.
- The mortgage loan seller must represent that, upon the origination of each mortgage loan, the improvements at each related property were in material compliance with applicable law.
Loan Terms, Haircuts and Other Conditions
The general terms and conditions of the TALF program apply to TALF loans that are secured by a CMBS described above, except as modified by the following terms and conditions:
The New York Fed expects collateral pools to be diversified with respect to loan size, geography, property type, borrower sponsorship and other characteristics, but will consider CMBS backed by nondiversified collateral on a case-by-case basis.
The New York Fed will engage a collateral monitor and will reserve the right, until the issuance of the CMBS, to exclude specific loans from each pool. In addition, the New York Fed will retain the right to reject any CMBS as TALF loan collateral based on its risk assessment.
The New York Fed expects the agreements governing the issuance of each CMBS and the servicing of its assets, and the terms and conditions of its underlying loans, to permit, and to provide in effect for, reporting that is sufficient to enable the New York Fed to monitor and evaluate its position as secured lender.
Each TALF loan secured by a CMBS will have a three-year maturity or five-year maturity, at the election of the borrower. A three-year TALF loan will bear interest at a fixed rate per annum equal to 100 basis points over the 3-year Libor swap rate. A five-year TALF loan is expected to bear interest at a fixed rate per annum equal to 100 basis points over the 5-year Libor swap rate.
The collateral haircut for each CMBS with an average life of five years or less will be 15%. For CMBS with average lives beyond five years, collateral haircuts will increase by one percentage point for each additional year of average life beyond five years. No CMBS may have an average life beyond ten years.
The average life of a CMBS will be the remainder of the original weighted average life determined by its issuer employing industry-standard assumptions.
Any remittance of principal on the CMBS must be used immediately to reduce the principal amount of the TALF loan in proportion to the TALF advance rate. For example, if the TALF advance rate was 85 percent, 85 percent of any remittance of principal on the CMBS must immediately be repaid to the New York Fed. In addition, for a five-year TALF loan, the excess, in any TALF loan year, of CMBS interest distributions over TALF loan interest payable will be remitted to the TALF borrower only until such excess equals 25% (10% in the fourth loan year and 5% in the fifth loan year) of the haircut amount, and the remainder of such excess will be applied to TALF loan principal.
A TALF borrower must agree not to exercise or refrain from exercising any voting, consent or waiver rights under a CMBS without the consent of the New York Fed.