As the Fed contemplates expanding TALF beyond highly rated, newly made loans to riskier or older troubled assets, it should go one step further to address the heart of the credit crisis -- depressed home prices.
TALF, or Term Asset-Backed Securities Loan Facility, is currently aimed at stimulating demand for AAA-rated securitized assets in auto loans, credit card loans, student loans and Small Business Administration-guaranteed small business loans. But to put the financial crisis behind us sooner rather than later, TALF- eligible collateral should include residential mortgage backed securities, or RMBS, that meet appropriate credit criteria and resecuritizations of RMBS originated after 2006.
Such a move would allow buyers of RMBS to get the same return on capital but pay higher prices for assets that are clogging bank balance sheets. If balance sheets improve, banks will be more comfortable originating new mortgages and extending more credit across all sectors. Up until now, most proposed solutions to the housing crisis have focused on supply by limiting foreclosures. Although this may help individuals who are at risk of foreclosure, it does little to remedy the massive supply and demand imbalance in the housing market.
Read the full editorial on The Deal website.