Finova Group Inc. said its commercial mortgage division is quitting the securitization business and will instead act as an origination arm for J.P. Morgan & Co.
The Phoenix finance company was the eighteenth-largest securitizer of real estate loans in the first nine months of the year, contributing $632 million of collateral to bond issues, according to the industry newsletter Commercial Mortgage Alert. But under its new arrangement with J.P. Morgan, Finova Realty Capital will only originate and close loans. Morgan will fund the loans, warehouse them on its balance sheet, and securitize them with other loans the banking company itself has originated. It has securitized $1.7 billion this year, making it the No. 7 contributor of loans to commercial mortgage-backed deals.
Observers said the pact shows how the commercial mortgage industry is responding to rising interest rates and the resulting shortfall in origination volume.
"Like many originators," said Michael D. Youngblood, head of real estate research at Banc of America Securities LLC, Finova is "probably disappointed with the origination volume they were able to produce in 1999. And they're probably not optimistic about doing even that level in 2000, given the higher interest rate environment and the fact that we have seen three tightenings" of credit by the Federal Reserve.
Finova and J.P. Morgan did not return phone calls seeking comment by press time. In a statement, R.J. Brandes, executive managing director of Finova Realty Capital, said the Morgan deal demonstrates his company's "responsiveness to evolving market conditions." The two together can achieve bigger volume and securitize more frequently than either could on its own, he said.
Several companies, Mr. Youngblood said, have either closed their commercial mortgage origination operations "or quietly downscaled their conduit activities." Even those that are still securitizing loans have had to team up with others to issue bonds. The combinations came about because companies have been unable to originate enough collateral on their own to make securitization worthwhile.
In June, Finova Realty closed four origination offices and fired 40 people. At the time, it said the reduction was "the result of its ongoing evaluation of staff productivity rather than any decrease in the company's current business volume."
Aside from rising rates, the industry is "going into a cyclical low in refinance activity that's having a major impact on volume," said Stacy M. Berger, executive vice president of Midland Loan Services, a unit of PNC Bank Corp.