U.S. banks are accelerating their push back into packaging commercial real estate loans into bonds, two years after the financial crisis ground much of the business to a halt.
Wells Fargo is one such bank, and has begun expanding its commercial mortgage-backed securities business, or CMBS, by tapping former employees of Wachovia Corp. — one of the segment's most prolific lenders before the crisis.
"I see lots of friends who used to be employed, and weren't for a while, and are now being rehired by institutions," said Jonathan Strain, head of debt capital markets for JPMorgan Chase & Co.'s CMBS division.
The wave of industrywide rehiring is emblematic of a sector that is struggling to recover from the financial crisis in time to provide the capital needed to avoid a $1 trillion refinancing nightmare for office, retail and apartment building loans made during the real estate boom.
The business of creating commercial real estate-backed mortgage securities has been showing incremental signs of life since the 2008 financial crisis. Lenders in New York this week predicted modest growth even as they must navigate a mine field of trouble, including rising defaults.
Several banks, along with Wells Fargo, have hired lenders to focus on making new commercial real estate loans to package into bonds, including companies like JPMorgan, Jefferies Group, and Deutsche Bank.
Boutique firm Guggenheim Partners on Wednesday formed a new commercial real estate unit.
At Wells Fargo, the bank is attempting to grow in an area in which Wachovia — which it bought in 2008 — once thrived.
New loans will feed Wells Fargo's CMBS business, although some will be held on the bank's books, a company spokesman said.
The bank in late May named John Tinkey as a managing director in its Real Estate Capital Markets division. The former Wachovia CMBS executive will be part of a three-man Charlotte, North Carolina-based team, lending on commercial real estate projects in North Carolina, South Carolina and Virginia.
Wachovia's commercial real estate lending group grew aggressively earlier this decade, bolstered in part by a colorful executive named Robert "Large Loan" Verrone, famous for quoting "The Godfather" when negotiating.
The bank helped engineer a $3 billion loan on New York apartment building complexes Stuyvesant Town-Peter Cooper Village in 2006, a deal which is now in default.
In 2007, the peak year for CMBS issuance, Wachovia bundled $24.2 billion of loans into bonds, exceeding No. 2 Bank of America and No. 3 Lehman Brothers by more than 35 percent, according to Commercial Mortgage Alert.
In 2008, Wachovia racked up big losses from holding on to large commercial mortgages that it had intended to sell. Verrone left the bank in the spring of 2008. Months later, Wells Fargo bought the bank in a deal encouraged by the Federal Deposit Insurance Corp.
Wells Fargo has also hired two lawyers to close commercial loans, including Gordon Nicol, formerly of Lehman, according to Commercial Mortgage Alert.
Banks are gambling such hires are going to pay off as the CMBS market regains steam in the coming quarters.
Last week, JPMorgan completed a $716 million commercial mortgage-backed securities offering, the largest of just five done since the financial crisis erupted in 2008. No new deals are currently in the market, though Deutsche Bank has made loans earmarked for a bond, and sources said Goldman Sachs Group Inc is readying an issue.
Analysts and bankers have widely feared commercial real estate, like home mortgages, would crater and turn the U.S. economy on its head.
Vultures are waiting in the wings as loans underwritten before prices and rents fell look for refinancing, but a stabilizing economy is easing some concerns.
Bankers and advisers who specialize in commercial real estate-backed mortgage securities said the sector may never fully recover to the peak of $237 billion in originations in 2007. Slightly more than $1 billion in CMBS deals have been completed this year.
One banker said the market may eke out $10 billion this year, and ultimately stabilize at roughly $100 billion in annual CMBS deals. This will ease but not solve the funding needs for maturing loans, which top $1 trillion over the next few years, analysts said.
"Supply will be far less than what we were accustomed to," said Lisa Pendergast, Jefferies' managing director for CMBS strategy and risk. Pendergast also serves as president of the CRE Finance Council, the industry's main trade group.
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