May 19 (Bloomberg) — The Federal Reserve will include legacy assets for the first time in a $1 trillion program to revive credit markets, expanding the effort to commercial real estate securities issued before the start of this year.

The central bank also expanded the number of credit-ratings companies permitted to rate assets for the Term Asset-Backed Securities Loan Facility to five after Connecticut Attorney General Richard Blumenthal told the Fed that the three initial eligible companies helped fuel the global credit crisis.

Today’s announcement is part of the U.S. government’s broader plans to revive credit for consumers and businesses and end the recession. Fed officials set terms for accepting older commercial mortgage-backed securities after some investors were disappointed that a May 1 announcement included TALF terms only for new CMBS.

The first deadline for investors to submit applications for loans to buy the older CMBS, or securities issued before Jan. 1, is in late July.

Adding older CMBS to the TALF is aimed at improving liquidity for the securities, which in turn “should facilitate the issuance of newly issued CMBS, thereby helping borrowers finance new purchases of commercial properties or refinance existing commercial mortgages on better terms,” the Fed said in a statement.

“The ability to pledge pre-2009 CMBS should assist mightily with the goal of injecting liquidity to that sector,” said Stephen Whelan, a law partner at Sonnenschein Nath & Rosenthal LLP in New York who works with clients on the TALF.

Fed Concern

Fed policy makers have repeatedly expressed concern about a downturn in the commercial property market this year, and a housing report today suggested the market is finding it tough to get financing. Builders broke ground on 46 percent fewer condominiums, townhouses and other multifamily dwellings in April at an annual rate than the previous month, the Commerce Department said.

The CMBS market has financed about 20 percent of outstanding commercial mortgages and “came to a standstill in mid-2008,” the Fed said. Sales of CMBS plummeted to $12.2 billion last year from a record $237 billion in 2007, according to estimates by JPMorgan Chase & Co.

The ratings expansion applies only to CMBS and not to the assets backed by auto and credit-card loans already accepted in the program, which began in March.

Eligible Collateral

The Fed said newly issued and older CMBS must have at least two AAA ratings from DBRS, Fitch Ratings, Moody’s Investors Service, Realpoint LLC or Standard & Poor’s and can’t have a rating below AAA from any of them. The Fed said it’s “more broadly” determining which ratings companies to use to determine eligible collateral for the central bank’s credit programs.

Blumenthal said today in an e-mail statement that the Fed’s move was a “positive first step to respond to our request to provide critical competition.” He urged the Fed to add more ratings firms.

Blumenthal wrote to Bernanke last month “strongly” urging the Fed to “reassess and revamp its current policy,” which favors large firms “whose mistakes helped precipitate the current crisis, over smaller ones seeking to break into the market.” Bernanke responded that the Fed was “conducting a broad review of our approach to using rating agencies.”

In March, the Fed and Treasury announced that the TALF may be expanded to finance older, or “legacy,” securities.

Older Loans

The central bank set June 16 as the first due date for requests for loans to buy new CMBS. It didn’t give a specific July date for applications for older CMBS loans. The next date for loan requests on other asset-backed securities is June 2.

TALF loans to investors to buy asset-backed securities totaled $15.9 billion as of May 13. Bernanke said last week that “early indications” show that investor demand for the central bank’s loans to buy ABS will rise next month from May’s total of about $11 billion.

DBRS, based in Toronto, in 2003 became the fourth ratings company to be recognized by the U.S. government. Horsham, Pennsylvania-based Realpoint won that designation last June and specializes in analysis of CMBS.

Fitch is a unit of Paris-based Fimalac SA. S&P is a unit of McGraw-Hill Cos. Moody’s is a unit of Moody’s Corp. All three ratings firms are based in New York.

Base Haircut

The so-called haircut, which is how much cash an investor will have to put up to buy the bonds, will be calculated by dividing a base haircut by the current market price. Buyers will have to put up more equity to purchase debt that’s trading at lower prices.

The Fed used a 17 percent base haircut as an example. If that bond is trading at 50 cents on the dollar, investors will have to put up 34 percent of the purchase price. If the bond is trading at 75 cents on the dollar, an investor would put up 23 percent of the purchase price.

Separately, the Fed gave a bimonthly update on its Web site of the collateral pledged by banks so they can draw on loans from the Fed. The value of loans and securities pledged by commercial banks fell to $1.23 trillion as of April 15 from $1.62 trillion on Feb. 18. The declines came across all asset classes, from commercial and consumer loans to asset-backed securities.