By creating a pool of commercial mortgages that will be convened to bonds, Denise Delaney, division executive of the Bank of Boston's new Real Estate Capital Markets group, is keeping both her bank and herself on the cutting edge of real estate finance.

"This is going to be a very big business, and if we don't stay in front, we'll lose our customer base," said Ms. Delaney, a former Bankers Trust New York Corp. official who joined Bank of Boston in 1989.

Next year, Ms. Delaney, a division executive since 1991, expects to originate, underwrite, and sell to Goldman, Sachs & Co. about 100 mortgages, totalling $250 million, at par. Each mortgage will be in the $750,000-to-$10 million range. Ms. Delaney's group will service the mortgages, which will be made on multifamily, retail, and industrial properties.

Goldman, for its pan, expects to market about $500 million in such bonds in 1995 as pan of a new business line. It says it expects to eventually have three other banks supplying mortgages to its program.

Barnett Banks Inc. and NationsBank Corp. are among the commercial banks forming conduits similar to Bank of Boston's. Further competition is expected from insurance and securities companies.

Commercial mortgage conduits are similar to the more familiar residential mortgage-backed securities programs of the Federal National Mortgage Association, the Government National Mortgage Association and the Federal Home Loan Mortgage Corp.

A Refinancing Dilemma

Bankers hope such conduits will be the answer to a problem pondered in real estate circles since 1990: How to refinance the $300-to-$500 billion in commercial mortgages that are maturing between 1994 and 1996.

Eventually, most long-term commercial mortgages are expected to wind up in securities. For the Bank of Boston, moving from traditional, asset-holding mortgage business into this new arena will not mean major changes in its portfolio, said Ms. Delaney.

"I would say that assuming the bank stays the same size, our originations will roughly double over the next five years," she says. "Our real estate business won't change as a percentage of total assets, though the percentage of originations to held assets will." Ms. Delaney declined to be specific about the proportion of originated to held assets. Bank of Boston's 1993 mortgage underwritings were $1.8 billion, $1.2 billion of which were new originations, she said.

Strategically, the conduit business will allow Bank of Boston to match its maturities by limiting originations for its own account to 3-to-5 year terms, and securitizing long-term debt, while reducing its outstanding portfolio of loans.

An added plus: Fewer mortgages on the books means lower required risk-based capital. "What we want to do is make our money in fees and from warehousing the loans, and also by selling them through our Treasury department," says Ms. Delaney.

Choices, Choices, Choices

As mortgages come due, says Ms. Delaney, borrowers will be offered a choice of long-term, nonrecourse loans or short-term loans with recourse she says. If they choose the former, the borrowers will be given standardized mortgage forms to sign that are not subject to negotiation. These mortgages are destined for the $125 million in warehoused mortgages that the Bank will sell the Goldman twice a year. If the borrower insists on a customized mortgage, on the other hand, it will have to accept a recourse loan with a 3-to-5 year term. The alternative? Go elsewhere.

The new business is likely to change how commercial loans are processed and how the department is organized, Ms. Delaney said. "In general I expect the commercial mortgage business to become more like the single-family mortgage industry, with segmented processing replacing one loan officer seeing the deal through to closing," she said.

The arrangement with Goldman will allow the Bank of Boston to return to a traditional construction lending business, Ms. Delaney said. "One element in the plan is to do construction loans, and then roll them into the conduit" as long-term permanent mortgages, she said. "But we may also do 3-to-5 year mini-perms, which is what we do now."

Six Tranches

The securities themselves will be sold in as many as six tranches, including an interest-only and principle-only strip, Ms. Delaney said. Spreads over treasuries for the loans will be 225-to-250 basis points for retail and industrial property issues.

Yields at point-of-sale, of course, will vary, says Sheridan Scheckner, a vice president at Goldman Sachs.

The bond market has been pricing similarly-rated mortgage bonds at about 100 basis points over treasuries for a Aaa piece, to 15 percent per year for unrated issues, he says.

Trimming Holdings

The Bank of Boston has worked hard to trim its real estate problems in the past five years, reducing its outstanding mortgage portfolio by $3.3 billion -- from $7.05 billion in 1989 to $3.74 in 1993 -- while writing down $1.09 billion loans and taking back $928 million in OREO in the same period, according to bank records.

The bank accomplished this, Ms. Delaney said, by selling many mortgages, and asking some customers to refinance elsewhere when their mortgages came due. "We recognized that there were some real holes in our portfolio, and there was a concerted effort to address our problems."

Mr. Reinbach is a freelance writer based in Lee, Mass.

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