The Federal Reserve Board announced Friday that it is expanding the asset classes eligible for its Term Securities Lending Facility to include triple-A asset-backed securities, including those backed with student loans, in an attempt to provide more sources of liquidity to the ailing market.
In order to accommodate the expansion of TSLF accessibility, the Fed also announced it would increase the size of its auctions to $75 billion from $50 billion.
A significant amount of securitized student loans are back by municipal bonds, according to Tom Deutsch, deputy executive director of the American Securitization Forum.
"Approximately 20% of outstanding student loans in securitizations are those originated by state and local entities," he said. "Like for profit entities, these originators face similar difficulties raising affordable capital in the secondary market."
Senate Banking Committee Chairman Chris Dodd, D-Conn., praised the move as a great help to the student loan market.
"The Fed's decision to accept government-backed, and AAA-rated, student loan securities as collateral will help inject much-needed liquidity into the student loan market," he said in a statement.
The move follows recommendations made by the ASF and the Securities Industry and Financial Markets Association during an April 15 Senate Banking Committee hearing that delved into the credit market turmoil's impact on student loan availability. During that hearing, Deutsch encouraged the government to permit the TSLF, which was created by the Fed in late March to provide more liquidity, to accept triple-A rated student loan asset-backed securities as collateral.
"Given the very limited credit risk ... this proposal would also appropriately balance managing federal government risk exposure with meeting the urgent need for additional sources of liquidity to help fund student loan originations," he testified.
On Friday, Deutsch said the Fed's action will help the market, but should not be expected to solve any underlying problems.
"You still have substantially high capital costs," he said. "[The TSLF expansion] will help bring those down to some extent, but I don't think this will fully solve the problem."
Under the TSLF, the Federal Reserve will lend Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential mortgage-backed securities, and non-agency AAA/Aaa-rated private-label residential MBS. As is the case with the current securities lending program, securities will be made available through an auction process.
