While $ billion was authorized for the program, only approximately $ billion in total was lent. Moreover, because loans were paid back as private credit markets improved, the maximum amount of credit extended under the program was about $ billion. Today, there is about $ billion of TALF credit outstanding. It is worth considering why the program was able to achieve such significant market improvements with a limited amount of balance sheet. The success of the TALF may reflect that it targeted a market under severe stress, one characterized by extreme liquidity premiums that had caused asset prices to become detached from the underlying credit quality of the securities. Under those conditions, our involvement was able to have a substantial effect, in part by pushing those markets back toward more normal functioning and pricing. To be sure, improvements in funding markets broadly and in the macroeconomic outlook during the course of the program clearly influenced the recovery of securitized credit markets. That said, the TALF lending mechanism has been widely credited with helping to jumpstart those markets. As markets have improved and the liquidity premium on securitized credit has shrunk, the TALF has become a less appealing source of funding. Indeed, borrowers have been prepaying their loans as spreads have narrowed below the TALF lending rate. At this point, those asset-backed securities markets that were supported by TALF appear to be standing on their own.
Issuance virtually ground to a halt, resulting in significant funding concerns for a variety of lenders who relied on securitization. These funding strains prompted some lenders to dramatically tighten underwriting standards, thus reducing overall credit to consumers and businesses. A prolonged shutdown of the securitization market could have compounded the credit crunch and increased the risk of an even more severe contraction of the economy than we experienced. In response, the TALF was created to provide liquidity in the form of term loans to investors in the least risky part—the AAA tranches—of particular types of asset-backed securities, including those backed by consumer loans, student loans, small business loans, and commercial real estate loans. The hope was that, by providing loans directly to investors against asset-backed collateral, the TALF would help stabilize and improve the prices at which those securities could be sold, thus reducing lenders’ costs of funds. With lenders’ funding strains alleviated, the extension of credit to consumers and other borrowers could occur on more favorable terms. While the TALF is essentially similar to other programs in its basic objective of providing liquidity and encouraging the extension of credit, it is worth highlighting that the TALF has several features that are not common in other liquidity facilities. First, TALF loans are non-recourse, meaning that the borrower can put the collateral to the Federal Reserve rather than repay the loan if the collateral value falls sufficiently below the amount owed. The provision of non-recourse loans helped to encourage investor participation.