A construction worker's helmet sat next to a Bloomberg terminal on the cluttered table behind Michael P. Higgins.
It was a fitting backdrop for the managing director of real estate finance at Canadian Imperial Bank of Commerce's CIBC Oppenheimer unit as he explained the merits of commercial mortgage conduit lending-a business his group is building up.
"If you're a bank and you're in the real estate business, this should be part of your business," Mr. Higgins said.
After last year's rout decimated Wall Street firms' real estate operations, the commercial-mortgage-backed securities market has sprung back to life, with banks playing a bigger role. Though industrywide loan volume is down this year, a number of banks are beefing up their conduits because securitization lets them serve real estate clients more profitably, and with less risk.
The ability to sell mortgages in the capital markets enables CIBC to make an extra 2% on each transaction, Mr. Higgins estimated. And because the bank does not hold the loans, it takes on real estate-related risk for months rather than years, he said.
Midland Commercial Funding, a division of PNC Bank, has opened offices since last summer in Washington, Dallas, Atlanta, Phoenix, Chicago, and Dallas, said Timothy A. Mazzetti, senior vice president.
Greenwich Capital, a division of NatWest Group, recently hired 11 real estate specialists from Capital America, the now-defunct lending arm of Nomura Holding America.
"A lot of people believe banks will ultimately dominate the CMBS market," said Jim Thompson, chief executive officer of Banc One Mortgage Capital Markets LLC. Mr. Thompson's firm, a joint venture between Bank One Corp. and Orix USA, manages $400 million of commercial mortgage securities and services $27 billion of loans.
Banks have the advantage of economies of scale, plus origination platforms, Mr. Mazzetti said. Wall Street firms "don't have the cost infrastructure to stay in" the conduit business, he said. "Not at a one- or two-point profit margin."
Conduits originate mortgages, warehouse them on their balance sheets, and repackage them as bonds, which they sell to institutional investors. The lenders collect interest on the loans during the warehousing period, but more importantly, they sell the loans at a profit.
Mr. Higgins at CIBC said he views the conduit business as a crucial-and highly lucrative-new activity. The unit is already well established in construction and interim financing.
"There's no point doing the bridge loan and then giving the permanent away to an investment bank or an insurance company," he said. "You've got to take advantage of that loan yourself."
CIBC recently completed its second securitization of real estate loans. The bank contributed $279 million of loans to the collateral pool for a $930 million bond offering. Two other banking companies also contributed collateral.
Last August CIBC securitized $181.4 million of loans-just in time to avoid the global liquidity drought that paralyzed the bond markets.
The Russia debt crisis of late August sent shock waves through international markets. Investors stampeded out of any bonds other than Treasury securities. The value of commercial mortgage bonds plummeted, and conduits could no longer sell their inventory profitably.
The market disruption claimed many casualties, most famously Capital America, which lost $275 million and closed its doors.
Commercial mortgage-backed bond prices have recovered, but conduit lenders are now focused on managing inventory risk. That means securitizations are smaller and sold more often than before, and the loan sizes that fit in are smaller as well.
CIBC, for its part, won't have more than $500 million of such loans on its books at a time, Mr. Higgins said, in contrast to lenders like Nomura, which were caught with billions on their books when the market faltered. It plans to do two or three securitizations a year; the next one is slated for June.
"We're not a high-volume shop," Mr. Higgins said, adding that the conduit's focus is on "moderate-risk loans with medium margins." CIBC will only lend up to 75% of a property's value, though others have been willing to lend more, he said.
Overall, Mr. Higgins' group originated $2.5 billion of real estate loans last year. This year, he expects it to originate $3.5 billion-$1.5 billion of mortgages, the rest construction and bridge loans.
Though CIBC's conduit originates loans with intent to securitize, all credits are underwritten by the parent bank's central credit committee as if the bank would hold them to maturity.
Because of the committee's stringency, Mr. Higgins said, the rating agencies give a AAA rating to a larger portion of the bonds. That in turn helps CIBC profit more from the securitization, he said. The more AAA bonds in a deal, the greater the proceeds collected by the conduit.
Investors that buy the riskiest portions of securitizations-the "B pieces"-have "more comfort in our underwriting" because of the credit committee's oversight, Mr. Higgins said.
CIBC is always looking for new customers, Mr. Higgins said. Last month it did its first transaction with S.L. Green Realty Corp., a real estate investment trust in New York City. The bank made four mortgages totaling $51 million on Manhattan office buildings.
"They provided us with a competitive offer that met our primary goals," said David J. Nettina, the REIT's president and chief operating officer. For the first two years, S.L. Green will pay only interest so it can retain more of the properties' cash flow, he said. CIBC plans to put the four mortgages in its June securitization.