Wells Fargo Builds CMBS Business Once Led by Wachovia

Wells Fargo & Co. is plunging back into the commercial mortgage-backed securities market that helped fell Wachovia Corp., the bank it bought in 2008 for $12.7 billion.

Wells Fargo added more than 20 bankers and support personnel during the past three months to increase loan originations and bundle them into CMBS, said Ed Blakey, who’s leading the effort with John Shrewsberry. Wells Fargo anticipates selling bonds, though the executives declined in an Aug. 16 interview to give a date.

“We believe there is going to be a resurgence of CMBS, and we are investing in anticipation of it,” said Blakey, head of commercial-mortgage lending and servicing. “Our pipeline is growing and we intend to be a leader of this market.”

Wells Fargo is pushing ahead in a market Wachovia controlled before it reported more than $2.1 billion of losses tied to CMBS in 2007 and 2008. Wachovia was the No. 1 underwriter from 2005 to 2007, with $81 billion of commercial mortgage-backed bonds, data compiled by Bloomberg show.

Wachovia, based in Charlotte, North Carolina, structured the largest CMBS deal in history, a $7.9 billion bond that included financing for the 2006 purchase of Stuyvesant Town-Peter Cooper Village, Manhattan’s largest apartment complex. The buyers ceded control of the property earlier this year after failing to make debt payments.

Late Payments

Wachovia also helped finance Lightstone Group LLC’s 2007 purchase of Extended Stay Hotels Inc., using $7.4 billion in debt financing. The hotel chain went bankrupt two years later.

Other deals made at the height of the market have gone sour. Late payments on CMBS rose to a record 8.25 percent as of July, compared with 3.04 percent a year earlier, according to Fitch Ratings.

Commercial property values have declined 39 percent from the 2007 peak, according to Moody’s Investors Service. The decline has made underwriting loans less risky, and banks can dictate more conservative terms and choose the most creditworthy borrowers, said Shrewsberry, head of the company’s securities and investment group.

“It’s a nice time to be originating loans, because you’re at a lower price point on the collateral, you can impose the right structure and there isn’t the frenzied competition” of a few years ago, Shrewsberry said.

Kara McShane

Wells Fargo hired Kara McShane, who led Morgan Stanley’s syndicate desk when the securities firm was among the top CMBS underwriters, to lead distribution, Susan Stanley, a Wells Fargo spokeswoman, said in an e-mail. Doug Mazer and Wayne Brandt were hired to lead East and West Coast originations, respectively, and Jon Martin is head of large loans, Stanley said.

Many of the Wachovia executives who led the push into CMBS underwriting had left by the time of the Wells Fargo purchase, Blakey said. The rest of the business was discontinued after the sale was complete, Blakey said. The bank now has 70 to 80 employees devoted to underwriting and packaging loans for securitization, down from a peak of 120, he said.

Wells Fargo is the top U.S. commercial real-estate lender, with more than $27 billion in loans last year, almost triple the amount of runner-up PNC Financial Services Group Inc., according to data compiled by the Mortgage Bankers Association.

Other firms are taking aim at the CMBS market. Macquarie Group Ltd., Australia’s largest investment bank, said in July it’s forming a group to originate U.S. commercial-property loans and bundle them into securities.

Cantor Fitzgerald

Bond trader and brokerage Cantor Fitzgerald LP said on Aug. 11 it would originate and securitize some $5 billion in loans during the next 12 months with Los Angeles-based CIM Group LLC.

Sales of commercial mortgage-backed securities plunged 95 percent to $11.2 billion in 2008 from a record $234 billion in 2007, according to data compiled by Bloomberg. Banks arranged $3.4 billion of the securities last year, and about $2.4 billion has been issued in 2010.

Volume may remain sluggish as new rules toughen rating company and underwriting standards, said Darrell Wheeler, head of CMBS strategy for Austin, Texas-based Amherst Securities Group LP.

“We have four or five CMBS conduit programs fighting for new originations, which makes it difficult for any one program to stand out,” Wheeler said.

Six deals have been announced this year including issues led by Goldman Sachs Group Inc. and Citigroup Inc., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc. Bank of America Corp. and Deutsche Bank AG are also looking to complete a deal, people briefed on the matter said earlier this year.

‘Wide Open’

Starwood Property Trust Inc. Chief Executive Officer Barry Sternlicht said during an Aug. 10 conference call that “CMBS markets are wide open” and suffer from too little supply rather than lack of demand from buyers.

“There’s been good demand for the CMBS issues that have come out so far in 2010,” said Matthew Anderson, managing director at Foresight Analytics, an Oakland, California-based bank and real estate research firm.

Banks will aim to take advantage of loans maturing over the next five years, Anderson said. Almost $1.5 trillion in commercial mortgages on the books of banks or bundled into securities come due between 2010 and 2014, he estimated.

“The market possibilities have re-emerged in a way that’s conducive to doing some business,” Shrewsberry said. “This is a rejuvenation.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE