NationsBank Corp. is grabbing for a bigger slice of the commercial mortgage securitization market.
The Charlotte, N.C., banking company said it is forming a strategic alliance with Midland Loan Services LP of Kansas City, Mo., one of the largest commercial loan servicing companies in the country.
The deal calls for the companies to jointly securitize the loans each originates, and for NationsBank to swap the servicing rights of a $4.2 billion commercial real estate portfolio for a 5% equity stake in Midland.
The portfolio's servicing is currently handled by a Memphis subsidiary of the former Boatmen's Bancshares, which NationsBank acquired in January. After trading the servicing rights to Midland, NationsBank will shut down the Memphis office and lay off about 30 former Boatmen's employees.
Officials at NationsBank and Midland declined to discuss the terms of the deal, which is to close in 90 days. But industry observers said the alliance is significant for its possibilities.
"It's a fascinating deal," said Carl Kane, national director for real estate consulting at KPMG Peat Marwick. "What they've put together is the ability to originate, the ability to distribute, and the ability to service. That is the model of how things are shaping up, and it makes them a major competitive player in the market."
NationsBank, a $227 billion-asset company, confirmed that it expects the alliance to make it a key player in the fast-growing and highly profitable commercial mortgage-backed securitization business.
"It certainly will elevate us," said William A. Hodges, president of NationsBank's real estate group. "We're both looking at a substantial increase in our volume activity and" expecting "a substantial increase" in revenue.
NationsBank's new ownership stake in Midland, which services a $14 billion portfolio, is also important, said Mr. Hodges. "We think they will become a public company one day," he said, "and we will be able to participate in their success."
Last year, NationsBank, through its capital markets subsidiary, issued $997 million of securities while Midland originated or acquired and securitized $883 million of commercial and multifamily real estate loans. Midland currently has a securitization arrangement with Prudential Securities, which ends in June.
NationsBank and Midland are both top players in the growing conduit market, where players originate and immediately securitize loans backed by commercial properties.
A growing number of traditional banks are getting into the business, vying for market share with investment banking concerns.
But in an environment where bigger mortgage pools mean bigger profit margins, more and more players are joining forces. Last year, about $10.2 billion of loans were securitized, up from less than $1 billion in 1993, according to Commercial Mortgage Alert, an industry publication.
"This is a marriage of two big players in the conduit market," said Tom Ferris, editor of Commercial Mortgage Alert. "By working together, they'll be able to reach the critical mass they need."