Consumer Credit Markets
Since November 2008, the Federal Reserve has taken decisive actions to unfreeze consumer credit markets. A major challenge has been to revive lenders’ funding sources so that they can in turn make credit available to consumers.
Particular effort has been focused on stimulating securitization, which for the past few decades has provided lenders with a large portion of their funding and enabled a vast expansion of credit to consumers, but which the financial crisis brought to a near standstill. Reviving the securitization activity is seen as an important step in reviving lending for education, automobiles, credit cards, and homes. For this reason, the Fed introduced several new lending programs designed to stimulate securitization.
The Term Asset-Backed Securities Loan Facility (TALF) lends to investors against their AAA-rated asset backed security (ABS) collateral. These securities are backed by credit card loans, autos loans, student loans, and different types of business loans, just to name a few. TALF lending began in March 2009 and now totals over $25 billion. The liquidity generated by the TALF is expected to enable financial institutions to increase the credit they extend to consumers for these kinds of purchases.
Indications so far suggest that the TALF is having a positive impact on consumer credit markets. In September 2008, the market for consumer ABS effectively shut down. This was particularly true for student loan ABS and credit card ABS. After the introduction of the TALF, the market began to revert to levels seen before the market’s collapse. For instance, total consumer ABS issuance in November was merely $0.5 billion, while six months later it had risen to $14.4 billion. This increase was not due entirely to Federal Reserve actions—the total increase in ABS issuance was larger than the amount lent under TALF. This would imply that banks are becoming less risk averse as they once again engage in securitization.
ABS yields, which capture the lenders’ cost of funds, had increased sharply in the weeks following the failure of Lehman Brothers. Those yields have essentially plummeted since the Federal Reserve started lending under the TALF. When the TALF was announced, the spread between credit card ABS and 5-year Treasury yields was 7 percent, and the spread between auto ABS and Treasury yields stood at 9 percent. Recently, those spreads declined to less than 2 percent, implying a fall in the perceived risk of those asset-backed securities.
To further increase lending, the Fed is purchasing mortgage-backed securities (MBSs) directly. Purchasing began in January 2009 and now totals over $450 billion. Through these purchases and the purchase of US Treasury bonds, the Federal Reserve is applying downward pressure on Treasury bond yields and the yields on the mortgage-backed securities. These efforts may have paid off, as the Treasury yields as well as the spread between Fannie Mae MBSs and Treasury securities have declined in recent months.
With more securitization, consumers ought to have easier access to credit since banks can raise their funds more easily and at a lower cost. Some evidence suggests that this is happening. Along with the thawing of securitization markets in recent months, we have experienced a significant decline in mortgage rates. The 30-year conventional fixed-rate has decreased from well above 6 percent near the end of 2008 to its current level of 5.38 percent. This is higher than the 4.78 percent of the previous month, but this latest rise in mortgage rates is likely due to an uptick in long-term Treasury bond yields caused by higher inflation expectations.