Though it is not exactly dominating family dinner table conversations, the Term Asset-Backed Securities Loan Facility is a big topic in Washington, where members of Congress, regulators and industry representatives are all weighing in on how to give this program some much needed momentum.
Since it was announced in November, the objective has remained the same: to increase credit availability for consumers and small businesses by facilitating the issuance of asset-backed securities.
The eligible collateral includes retail auto loans and leases, student loans, credit cards and small-business loans. In recent months commercial mortgages have been added to this mix.
One of the biggest Talf proponents is the auto finance industry, which, understandably, would like nothing more to than to make full use of this government initiative to meet the credit needs of its customers. So far it has been unable to do so.
This month news stories reported that the facility had been used to back six retail and lease auto ABS issuances totaling $7.7 billion in March and April — a far cry from the program's lending capacity of up to $1 trillion. No securities backed by auto floor plan loans have been issued under the facility at this writing.
The inability of domestic auto finance companies to get funding for floor planning creates systemic risk for the entire auto finance market, given that most dealerships sell a variety of car brands. When a dealer cannot obtain credit to buy needed inventory, it affects the overall health of the dealership and its ability to sell all its brands, both domestic and nondomestic. As we're starting to see, the result is a domino effect that ultimately impacts all creditors and dealers.
In a May 8 Viewpoint ["Transparency Precursor to ABS Liquidity"], Experian's Kerry Williams wrote in favor of a federal government mandate for more consumer credit information in the Talf program to help investors evaluate the underlying asset risk. We agree that increased transparency will improve the process further down the road, but other steps are needed immediately to energize the markets.
To increase Talf participation, we recommend that the government:
- Expand eligibility to include all investment grades for floor plan financing. Currently, each issuance must obtain the highest tier rating (triple-A) by each of the three major agencies. As a result, an estimated 50%-60% of floor plan financing is not eligible, and many finance companies that would like to issue Talf securities cannot do so.
- Tighten the "haircuts." Auto finance companies expect — and support — haircuts as a way to offset the risk associated with the underlying asset, but many companies with eligible securities, such as those in the wholesale markets, have not participated, because the current haircuts and spreads are too costly.
- Avoid actions that, in effect, penalize Talf participants. At an American Financial Services Association investors' conference in late April, several institutional investors expressed reluctance to participate, because of concerns that the government might impose "profit taxes" and executive compensation restrictions at a later date.
Despite its slow start, this program can be turned around if the government adopts these recommendations. Without additional changes, lenders will continue to face funding challenges, and many potential borrowers may still find themselves unable to buy or lease a car.