Fed Admits It Accepts Unworthy Collateral In TALF

Tyler Durden's picture

Yesterday the Federal Reserve Board of New York made an announcement, indicating recent posturing that it would carefully pick collateral for the TALF program, has been a sham (not that we would expect anything out of Bernanke, Cheatem and Howe). One wonders what the utility of having so many new NRSROs recently hired by the Fed receive taxpayer money and to share their perspective on collateral quality, when the Fed openly overrides them and decides what legacy loans are TALF-worthy on its own.

Here is the Fed's mea culpa:

The New York Fed continuously reviews the stress value estimates and recently identified and corrected a methodological error.  The New York Fed has determined that as a result of this error, one legacy CMBS — CUSIP 059497AX5 — was accepted as collateral that would not have been accepted using the current methodology. However, the New York Fed continues to expect no losses on the loans backed by this CMBS because the stress value is based on extremely unlikely economic circumstances, and because the market value of this CMBS is well above the TALF loan amounts.

We all know how good the Fed is at predicting, or, as some would say, creating, "unlikely economic circumstances." As for the market value, did it ever dawn on the idiot savants over at 33 Liberty that prices are merely a reflection of the Fed's own TALF/PPIP program. By including worthless crap such as this, which receives taxpayer-funded leverage, of course market value of CMBS classes will be above loan amounts. We are confident the Fed will figure this out on its own eventually, hopefully not too long after the Fed is forced to provide information on just how many other 059497AX5-comparably worthless CUSIPs are part of the Fed's backstop programs.

In fact, the Fed apparently realized what a big mistake it has made by adding the following disclaimer:

The New York Fed will not accept CMBS CUSIP 059497AX5 as collateral for new TALF loans at or around its current market price. 

But wait, we thought the market price indicates no impairment to taxpayer loans is ever possible? Why the contradiction?

So instead of buying any Kool-Aid spewed forth by the liars and thieves from the money printing syndicate, we decided to analyze the details of CUSIP 059497AX5.

The loan in question is BACM 07-1, a Bank of America Fusion deal, with a current balance of $3.1 billion. According to the most recent remittance report, this loan has 13.3% of its constituents in delinquency or special servicing, for a total of $417.47 million. This means that as of today, less than 87% of the loan is in pristine condition. Furthermore, $1 billion of the loan consists of office properties, 40 of them to be exact, and is also exposed to $146 billion in 9 hotel properties, and $638 million in multifamily units. We can't wait to see the full pain that the Fed will experience as a result of ongoing deterioration in these three key CRE verticals. Geographically, 18.6% of the loan has California exposure, and 13.2% of it is based in New York.

Most recently, $342 million of properties were unable to cover their debt service (DSCR <1), while $1.2 billion had a precarious DSCR of less than 1.25 and deteriorating. Less than one third of the entire deal had a DSCR of a relatively safe over 1.5.

A summary of the riskiest properties in the TALF-eligible but not collateral is provided below:

And, most importantly, the borrowers who get to benefit from this "spurious" TALF inclusion are CESC Skyline, Maguire Partners, Magazine Portfolio Holdings, VII Pac Shores and 575 Lexington Avenue.

The most impaired properties are Solana in Westlake, TX, 30 days delinquent for $220 million, Indian Hills Apartments, 30 days delinquent for $46 million, 575 Lexington, watchlisted at $162 million with a 0.62 DSCR, 1412 Broadway, watchlisted at $102 million, a 0.7 DSCR. We expect many more properties in this deal to collapse shortly, and we can't wait to hear more lies from the Fed notifying idiot readers that all is well with its subsidization of increasingly more worthless CRE holdings.

We will continue monitoring future Fed lies in the CRE and TALF area closely and will report on all as we see them.