updated 8/17/2009 1:49:58 PM ET 2009-08-17T17:49:58

The Federal Reserve has extended the length of a program intended to spur lending to consumers and small businesses at lower rates, but the central bank said it had no plans to expand the types of loans being made.

The Fed said Monday it was extending its Term Asset-Backed Securities Loan Facility through March 31 for most of the types of loans it makes. The program was scheduled to end on Dec. 31.

The TALF started in March and figures prominently in efforts by the Fed and the Obama administration to ease credit, stabilize the financial system and help end the recession. Under the program, investors use the funds to buy securities backed by auto and student loans, credit cards, business equipment and loans guaranteed by the Small Business Administration.

Commercial mortgage-backed securities, which were added to TALF in mid-June, were extended through June 30 because issuing new securities in that area “can take a significant amount of time to arrange,” according to a joint news release from the Fed and the Treasury Department.

The commercial real estate portion of the TALF is designed to boost the availability of such loans, help prevent defaults and facilitate the sale of distressed properties. Delinquency rates on commercial loans have doubled in the past year as more companies downsize and retailers close their doors, the Fed has said.

Economists said any help there is critical because of the rising defaults. Small and regional banks face the greatest risk of severe losses from commercial real estate loans. Federal regulators on Friday announced the biggest bank failure this year, the collapse of Montgomery, Ala.-based real estate lender Colonial BancGroup Inc.

“The larger banks are stabilizing because they went through the stress tests, but many smaller banks are still in deep trouble,” said Mark Zandi, chief economist at Moody’s Economy.com.

The TALF, he said, also has experienced only limited success in its major goal of jump-starting loans to support the market for securities backed by consumer credit cards, auto loans and small business loans — the huge market known as the shadow banking system.

“If these markets are not working, then credit does not flow freely to U.S. households and businesses,” Zandi said.

The program got off to a lethargic start, hobbled by rule changes, investor worries about financial privacy and fears that participants might become ensnared in an anti-bailout backlash from the public and Congress.

The TALF has the potential to generate up to $1 trillion in lending for households and businesses, according to the government. Spurring such lending is vital to turning around the economy but as of Aug. 12, the amount of loans outstanding in the TALF stood at just $29.6 billion.

The Fed and Treasury on Monday said they were prepared to reconsider the decision not to expand TALF lending to more areas if financial or economic developments merit such action. However, the government believes the financial system is beginning to stabilize after being hit last fall by the worst financial crisis since the Great Depression.

“Conditions in financial markets have improved considerably in recent months,” the Fed and Treasury said in their statement. “Nonetheless, the markets for asset-backed securities backed by consumer and business loans and for commercial mortgage-backed securities are still impaired and seem likely to remain so for some time.”

The Fed last week delivered a vote of confidence in the economy, saying the downturn appeared to be “leveling out.” Fed officials also said they would slow the pace of a program to buy $300 billion worth of Treasury securities, an effort aimed at keeping mortgage rates affordable. The central bank said it planned to shut down the program at the end of October.

Monday’s announcement was another signal the Fed wants financial markets to know it’s closely monitoring its emergency credit programs to ensure they do not generate unwanted inflation once the economy begins to grow again, economists said.

“This action reflects the Fed’s view that the economy is stabilizing but it is far from a durable recovery,” said Sal Guatieri, an economist at BMO Capital Markets.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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