WASHINGTON - Federal regulators yesterday announced $800 billion of new lending and debt purchasing programs designed to free up the housing, auto, credit card and student loan markets, but said they will not cover tax-exempt securities, drawing concerns from the muni market.
The Treasury Department and Federal Reserve unveiled programs that would purchase up to $600 billion of debt sold by government-sponsored entities Fannie Mae and Freddie Mac as well as Ginnie Mae and the Federal Home Loan Banks, and create a smaller, $200 billion lending program that would allow investors to borrow from the Fed using auto, credit card and student loan asset-backed securities as collateral.
Though nonprofit student loan lenders that sell both taxable and tax-exempt asset-backed securities were hopeful that their bonds would be eligible collateral for the ABS lending facility, Treasury Secretary Henry Paulson appeared to rule out that possibility, at least for tax-free debt, in a morning press conference.
"The asset-backed paper program is not focused on tax exempt financing," said Paulson, who strained for words as he described the department's position on munis, essentially saying that he hoped to use some of the $700 billion Troubled Asset Relief Program to assist municipal issuers, but only indirectly.
"Whenever we ... think about ... this area, we think about it in terms of some of the insurance programs that would make sure that ... these issuers had a ... strong triple-A rating that would let them ... do funding." he said.
Treasury and Fed officials did not respond to e-mails and telephone calls about the ABS program.
While Paulson said that the program, which is expected to launch early next year, would ultimately give a boost to consumers, some nonprofit student lenders that issue taxable as well as tax-exempt debt are concerned the Fed and Treasury will lump them in with tax-exempt issuers and therefore not make this program available to them. The Fed has excluded tax-free paper from some of its programs before, including its Commercial Paper Funding Facility that was announced in October.
Other lenders said there are very few dealers willing to underwrite new issues and this program will not help them. Woody Farber, president of the New Mexico Educational Assistance Foundation, said his agency as been forced to privately place bonds with state treasurer's office. He said he is not sure how the Fed's new ABS program would help issuers bring new bonds to market.
"I don't see how it's going to encourage underwriters to support new student loan deals," he said.
Other market participants praised the Treasury and the Fed for trying to help restore student loan lending, but expressed concern that state or state-level student loan agencies would be excluded from the ABS program.
"State or locally affiliated student loan agencies are a major component of the student loan financing system and excluding them from this program would erode the value of the program," said Michael Decker, co-chief executive officer of the Regional Bond Dealers Association. He stressed, however, that he thought the program was a positive development.
Meanwhile, Peter Warren, president of the Education Finance Council here, which represents nonprofit student loan lenders, said: "It is good they are doing something to try to improve student loan capital market conditions - but it's not clear that this is targeted in a way that will directly benefit nonprofit issuers."
Under the Term Asset-Backed Securities Loan Facility, or TALF, the Federal Reserve Bank of New York will establish a special-purpose vehicle to make non-recourse loans for at least one year to holders of certain triple-A-rated ABS, the underlying loans of which are "newly or recently originated exposures to U.S.-domiciled obligors." The eligible collateral includes auto, credit card, and student loan-backed debt, as well as small business loans guaranteed by the federal Small Business Administration.
The interest rates on the loans will be set by auction, and the Fed will institute a "collateral haircut," meaning that it will deduct a percentage of the par value of the ABS used as collateral. Each borrower must use a primary dealer, which will act as an agent. And Treasury will essentially guarantee the lending facility by allocating $20 billion of TARP funds to back it.
Sources said yesterday that the terms may not be helpful to many student loan lenders because most student loan ABS were not recently issued and therefore do not have underlying loans that were newly or recently originated.
Most of these ABS were sold as auction-rate securities prior to August 2007, when the auction-rate market first began to freeze up. The market collapsed in February, leaving many lenders with billions of illiquid assets.
It remained unclear to several sources yesterday if any of the student loan ARS that some issuers have restructured to variable-rate demand obligations since February would be considered "new" securities for the purposes of the TALF. One source, who asked not to be named because he did not want to openly criticize the Fed, said that the success of the program would depend on the disclosure of additional details, particularly on the "haircuts" that the Fed offers on the collateral.
But, the source said, "if this works, it'll kinda be like the paddles they put on someone's chest" to restart their heart. "If they start supporting some of these transactions, it could hasten the day for recovery of an ABS market that would operate with little or no federal intervention."
For months, student lenders, which originate federally guaranteed loans through the Federal Family Education Loan, or FFEL, program, have been squeezed by higher issuance costs and reductions in the amount of interest that the federal government allows them to earn on the loans that they originate.
While nearly 170 FFEL lenders have partially or entirely suspended their participation in the program because lending has become unprofitable, the remaining lenders have actually experienced an increase in overall lending, as more students have sought loans, according to the Department of Education.
So far this year, FFEL lending rose to about $42 billion from $39 billion last year, while the direct federal lending program rose to about $18 billion from $12 billion over the same period, the DOE has reported.
In addition to nonprofit lenders, there are also commercial banks - such as Citigroup Global Markets Inc. - that have large FFEL student lending businesses, as well as for-profit "monolines," like Sallie Mae, which is the largest FFEL lender in the country.
The TALF brings to five the number of facilities the Fed has created this year to ease the credit crisis. The Bear Stearns & Co. crisis in March prompted the Fed to create the Term Securities Lending Facility and the Primary Dealer Credit Facility. Following the Lehman Brothers Holdings Inc. bankruptcy filing in October, the Fed created the Money Market Investor Funding Facility and the Commercial Paper Funding Facility.