Conduit Lets Banks Make Commercial Loans They Normally Would Pass Up

When a customer needed money to buy a local property last year, Country Bank had a problem.

Already holding two loans to the same investor for other development properties, the Carmel, N.Y.-based bank was stretched to its $1.5 million limit for loans to one borrower.

But instead of turning away its regular customer as it would have in the past, Country solved the problem by refinancing one of the older loans through ValuExpress, a New York-based commercial loan conduit for community banks.

Under ValuExpress' year-old mortgage program, small banks like Country now can originate commercial real estate loans well beyond their legal lending limits for sale on the secondary market. The moment a loan is closed, ValuExpress buys the credit and immediately sells it to Donaldson, Lufkin & Jenrette Securities Corp. for securitization.

The program allows the community banks to better serve the needs of their business customers, attract new ones, and cross-sell their products, ValuExpress officials say.

In return for providing the loans to ValuExpress, the community banks get at least a 1% fee for each transaction, giving them a needed boost in fee income without committing any of their capital. The bank that originates the loan bears no collection risk.

"It's an opportunity for us as a very small bank to look at loans that normally we wouldn't consider because of the size," said Edward H. Raff Jr., vice president of $70 million-asset Wilton Bank in Connecticut.

ValuExpress also gets up to a 1% fee for serving as a middle-man. Presently, there's about $158 million in loans in the pipeline on their way to Donaldson for securitization. Three commercial mortgage credits are already part of a pool being marketed by the Wall Street firm.

"We bring Main Street to Wall Street," said Louis Tallarini, ValuExpress executive vice president.

The conduit was originally designed exclusively for community banks which are too small to make large commercial loans or prefer not to hold these types of credits in portfolio.

Already, about 17 banks in 25 states around the country are participating in the program, and another 25 banks are close to joining. And since the firm began marketing to several thousand institutions in November, about 200 more banks have responded and have requested more information.

The average loan is about $3 million, but one bank had even proposed selling a $23 million credit for a hotel/office complex in New Jersey.

Permitted credits include fixed-rate loans of up to $15 million each to finance multifamily, retail, office, industrial, hotel, nursing home, self- storage, and manufactured-housing properties. Exceptions can be made for some loans of higher amounts.

The loans are all backed by collateral only, without any personal guarantees, and have terms of 7, 10, and 15 years. Loan-to-value ratios are typically 70% to 75%.

The program has even attracted the participation of four regional banks: Huntington Bancshares, Columbus, Ohio; Buffalo-based First Empire State Corp., Portland, Ore.-based U.S. Bancorp, and Centura Banks, Rocky Mount, N.C.

That's because while those banks don't like booking nonrecourse loans, some of their borrowers prefer them. Selling the loans to ValuExpress satisfies both parties' needs.

"The billion-dollar banks are the exception but we found there was such a need that we had to service it," said Mr. Tallarini. "The big-bank business has been much more material than we had originally thought."

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