March 20 (Bloomberg) -- The Federal Reserve expanded collateral eligible for its auction of Treasuries to include bundled mortgage debt and securities linked to commercial- property loans.

The New York Fed bank, which is conducting the $200 billion Term Securities Lending Facility program, set the amount of the first auction on March 27 at $75 billion. The new collateral list will be applied in the first weekly auction instead of the second, as originally intended.

Central-bank officials are increasing efforts to ease logjams in credit markets that are exacerbating the economic slowdown by making it harder for companies and consumers to get loans. Under the program, first announced on March 11, the Fed will accept debt that's more difficult to borrow against than Treasury notes, the world's most liquid securities.

``Everyone's waiting for help at financing some of these more difficult mortgages,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``It's a good thing that they're bringing it forward.''

The separate Primary Dealer Credit Facility, which opened March 17, accepts other collateral including investment-grade corporate securities, municipal securities and mortgage-backed securities. That lending, along with a lifeline to Bear Stearns Cos. last week, represents the Fed's first loans to non-banks since the Great Depression, as policy makers seek to prevent a financial-market meltdown.

Talks With Dealers

The changes came after ``extensive consultation with market participants,'' the New York Fed said in a statement today. The Fed previously said it would accept residential mortgage-backed securities as collateral and consult on details of the program with the so-called primary dealers, the 20 banks and securities firms that trade directly with the central bank.

It's the first time the Fed will lend Treasuries in exchange for debt that includes mortgage-backed securities. The central bank will increase the program as needed. Officials said March 11 that the program is aimed at countering a decline in liquidity in financial markets around the world, and comes after signs of increasing stress in U.S. mortgage securities.

The Federal Open Market Committee approved the TSLF in a 9-0 vote on March 10.

The new eligible collateral for the TSLF includes agency collateralized-mortgage obligations and AAA/Aaa-rated commercial mortgage-backed securities, in addition to similarly rated private-label residential mortgage-backed securities and any collateral normally eligible for Fed open-market operations.

Submit Bids

In the TSLF, the primary dealers will submit bids to the Fed, which will then Treasuries for 28-day periods in return for debt that includes the new collateral as well as AAA-rated residential mortgage securities sold by Fannie Mae, Freddie Mac and by banks. The Fed expects the primary dealers to lend the Treasuries on to other firms in return for cash, helping the dealers finance their balance sheets.

The Fed scheduled the second auction for April 3 and said the central bank's Open Markets Desk will announce the size and the eligible collateral the prior day.

``The size and schedule of eligible collateral of all future auctions will be based upon the desk's assessment of auction demand, as well as on information gathered in ongoing discussions with market participants and prevailing funding market conditions,'' the Fed said.

Tumbling Prices

Prices of AAA-rated commercial-mortgage securities have tumbled 4.6 percent over the past three months, according to Lehman Brothers Holdings Inc., as declines beget a tightening of lending against the bonds, creating further margin calls and reducing the attractiveness of the investments.

Like in the residential real estate market, prices of office buildings, shopping centers and other types of commercial properties are falling, raising concern that borrowers may not be able to pay back their mortgages. Commercial real estate prices fell 0.6 percent in January, the third straight monthly decline, Moody's Investors Service said yesterday.

Yields on commercial mortgage-backed securities rose to 4.09 percentage points more than Treasuries as of March 14 as investors demanded more yield to compensate for the increased risk of default. The so-called spread was just 0.82 percentage point a year ago, according to Morgan Stanley indexes.

Prices of AAA commercial-mortgage securities have tumbled 4.6 percent over the past three months, according to Lehman Brothers Holdings Inc. index data, as declines and bank capital constraints caused a tightening of lending against bonds, creating further margins calls and reducing the attractiveness to buyers such as hedge funds that use leverage.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net

Last Updated: March 20, 2008 16:39 EDT