The Federal Reserve’s Term Asset-Backed Securities Loan Facility, announced in late November to cheers and praise, is unlikely to reinvigorate the consumer credit markets, according to a new report from TowerGroup. TALF is designed to revive the flagging ABS market, which essentially shut down as 2008 progressed. The report notes that U.S. credit issuers “rely on ABS for 50 percent of the capital funding for their lines of credit.” Home equity loans and lines of credit are largest users of ABS; student and auto loans “have been heavily dependent on ABS as a funding source.”
TALF is supposed to restore confidence to the ABS world, but the “remedy is not up to the scale of the problem,” according to the TowerGroup report, partly because of proposed FASB rule changes that would force financial institutions to put ABS and other derivatives on the balance sheet, partly because of the tough new restrictions imposed on credit card issuers, and partly because TALF’s volume—the Fed will offer $200 billion in nonrecourse loans—is dwarfed by the magnitude of the problem.
“One of the biggest hurdles is that the Fed is focusing exclusively on new loans,” says report co-author Dennis Moroney, research director of bank cards at TowerGroup. The auto market remains moribund, and “investors are still sitting on the sidelines,” he notes. “We need to securitize existing loans,” adds co-author Bobbie Britting, TowerGroup’s research director of consumer lending. “There’s not much new money. The auto finance companies have pulled back, while the banks are funding some newer loans,” according to Britting.
Moroney compares the current consumer lending situation to barnacles on a ship: “Not any one barnacle gets you. They all chip away at your hull. There’s a shroud over everything. Holiday sales look terrible.” Small businesses will be helped by TALF, Britting believes. ”Part of the difficulty is that small businesses were using home equity lines and loans to meet expenses. That credit shut down and they lost cash flow.” TALF could turn on another spigot for small business owners, though the flow will be modest.