Loans for credit cards may soon be a little easier to get as $200 billion in the TALF program will be injected into the frozen lending sectors.
The Federal Reserve and the Department of the Treasury announced March 3 the launch of the TALF program as part of an effort to unfreeze these critical parts of the credit market and get lenders lending again. Applications are now being accepted; the funds release is scheduled to happen by March 25. The second funding effort will be announced March 24.
TALF is designed to reopen the asset-backed securities market, which has declined significantly as investors have withheld from backing banks that issue credit and loans, reducing the amount of money available to lend. This particular part of the federal government’s economic plan is aimed at three types of consumer loans: credit cards, student loans, auto loans and small business loans.
Asset-back securities (ABS) are investment vehicles where investors buy up the loan balance that is issued to a consumer by a bank or other credit issuer. The issuer gets an immediate payment on their loan or balance, while the investor profits from a steady return in interest payments, or in assets such as a house or car.
However, as the economy has nosedived and consumers have begun to default on their loans, investors have begun to steer clear of asset-backed securities because of their high risk. With dwindling investing in securities, banks have been unable to lend to consumers. Business in the ABS market practically ceased in October 2008 to just $500 million, down from $51 billion in October 2007.
TALF will funnel money directly to these investors with the intention that they will return to investing in asset-backed securities for low-risk, or AAA-rated, securities.
“These markets have historically been a critical component of lending in our financial system, but they have been virtually shuttered since the worsening of the financial crisis in October,” according to the Fed’s release. “By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy.”
The plan is intended to eventually generate up to $1 trillion in lending as investors see returns and gain more confidence.