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APARTMENT FINANCE TODAY • FEBRUARY 2008

Balancing GSE and CMBS

KeyBank to focus on building out small loan program in 2008.

By Jerry Ascierto

KeyBank Real Estate Capital is hoping that its Fannie Mae, Freddie Mac, and Federal Housing Administration (FHA) production will pace its growth in 2008.

The company is also building out its small loan program with hopes of doubling that division’s production in 2008. KeyBank originated more than $600 million in its government-sponsored enterprise (GSE) and FHA programs in 2007, and saw a big increase in the second half as the market for commercial mortgage-backed securities (CMBS) declined. In fact, the company increased its GSE production threefold from July to August 2007 alone. For the year, the company originated more than $600 million in Fannie Mae, Freddie Mac, and FHA financing.

The company expects that trend to continue well into 2008, with plans to nearly double its agency production to between $1.1 billion and $1.2 billion this year.

KeyBank’s FHA lending program has seen increased interest from marketrate developers. When the CMBS market declined mid-year, and traditional construction lenders reined in their volumes, developers renewed their interest in the FHA’s program.

“A lot of banks are at full capacity right now because they have taken up so much slack from the CMBS market, and a lot of lenders have tightened their underwriting standards,” said Bruce Minchey, chief underwriter for KeyBank’s FHA program. “All of that is causing people to take another look at the FHA.”

The FHA’s Sec. 221(d)(4) program features a 90 percent loan-to-cost ratio, a 1.11x debt-service coverage ratio, 40-year amortization, and is non-recourse. What’s more, developers can lock in the interest rate for both the construction and permanent loan at closing. Rates for the FHA’s Sec. 221(d)(4) program were hovering in the 6.15 percent range as of press time, Minchey said, down from as high as 6.5 percent in the fall.

Based on the renewed demand, KeyBank plans to double its FHA production to $300 million in 2008, and expects to see more seniors housing deals use the program in 2008.

Small loans

The company is also focused on building out its small loan division, KeyBank Commercial Mortgage Access, which uses a conduit execution. In June, the company hired Charles Krawitz, who formerly built out LaSalle Bank’s small loan division. The Commercial Mortgage Access division continued to add staff throughout the year to help it achieve its goal of doubling production in 2008.

KeyBank Commercial Mortgage Access, whose loans average $1.5 million, was quoting financing at 6.25 percent in early January. That’s the lowest rate it has been able to quote in the last six months, during which the division’s rates rose as high as 7.8 percent. Part of the reason prices were so low in January was the rate on the 10-year Treasury, which dropped to 3.8 percent in early January.

The company is also confident that the CMBS market will normalize in the first half of 2008, and is using a hedging strategy to deliver loans now for its small loan operations. The company is holding its small loans on its balance sheet, and plans to securitize them once the CMBS market stabilizes.

Krawitz believes that the CMBS market is starting to show signs of life again, and that liquidity will return to the market sooner than some may expect.

“There’s great value in CMBS bonds,” said Krawitz, managing director for KeyBank’s Commercial Mortgage Access division. “I’m confident that with every passing day of solid fundamental real estate performance, that people will scratch their heads and say, this is something I should get into.”

Minchey also believes that liquidity will return to the market in the first half, albeit at a measured pace. “It’s going to take some time before the CMBS market comes around, and even when it does, the underwriting standards probably won’t be where they were before,” he said. “But the liquidity will come back over time as people realize that some of their fears were unfounded.”