Americans for Fairness in Lending

By Juan Lagorio - Analysis

NEW YORK (Reuters) - The Federal Reserve's plan to back consumer loans should start to unlock securities markets, but individuals will have to wait for at least three months for easier access to credit, according to analysts.

Under the Term Asset-backed Securities Loan Facility (TALF), announced Tuesday, the Federal Reserve Bank of New York will lend up to $200 billion to holders of securities backed by student, auto, and credit-card loans. The hope is that banks, in turn, will find it easier and more profitable to lend money to consumers.

Analysts said the deal could end the paralysis that has gripped the consumer asset-backed securities markets and help ease bank borrowing costs, which have soared in the last two months amid the worst global financial crisis in decades.

"You have another mechanism they are trying to implement to free up the credit markets, but I don't think there's any silver bullet that is going to fix everything," said Walter Todd, a portfolio manager at Greenwood Capital Associates, a Greenwood, South Carolina-based investment adviser.

But the outlook is still gloomy for the holiday season as consumers -- already swamped by rising home foreclosures, unemployment and credit cards debt -- will have to wait at least three months to see greater access to credit, according to experts.

"The Fed is doing everything it can to save Christmas because very large amounts of holiday shopping are financed through short-term borrowing," said James Ellman, president of Seacliff Capital, a San Francisco, California-based investment manager.

"The negative momentum in consumer credit is already quite significant. This may blunt the momentum, but it will not likely change its direction 180 degrees," he added.

Consumer spending, which fuels two-thirds of U.S. economic activity, fell at a 3.7 percent rate in the third quarter, the sharpest since the second quarter of 1980, the government reported on Tuesday.

Spending on durable goods like new cars and home appliances, intended to last three years or more, dropped at a 15.2 percent rate, the steepest since the start of 1987.

'MYSTICAL' EXPANSION

"At this point in the cycle, it would take a lot to really move a needle and make consumer credit more available. The consumer access to credit is increasingly negative right now. Today's government's actions will mitigate that trend, but will not reverse it," Ellman said.

"This latest plan is clearly just throwing scraps of five-day-old food at small businesses through some mystical loan expansion," said George Cloutier, chief executive of American Management Services Inc, a consultant to small and medium-sized businesses.

William Dunkelberg, chief economist of the National Federation of Independent Business, said rather than try to guarantee existing loans, the government should back new loans, for a certain fee, to get banks to start lending more to small businesses.

Financial institutions globally have already written down more than $500 billion in toxic loans and other bad assets as a result of the credit crisis.

Anticipating increased consumer credit losses next year and worried by rising unemployment as the economy sinks into recession, U.S. banks have been tightening lending standards. They have become especially squeamish after watching peers such as Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) and Washington Mutual Inc (WAMUQ.PK: Quote, Profile, Research, Stock Buzz) unravel due to risky bets.  Continued...