Home equity lender Contifinancial Corp. made a bigger commitment to commercial mortgage lending this week.
Contifinancial purchased a third of First Security Commerical Mortgage, Chicago, and almost half of its servicing affiliate, First Security Commercial Mortgage Servicing. It also bought 35% of GateCapital, San Francisco.
First Security originates commercial mortgage loans through retail, broker and correspondence channels. Last year, the company originated $162 million such loans for Contifinancial's commercial mortgage conduit. First Security's servicing division services $353 million in loans.
GateCapital is a new company that will originate, service, and securitize commercial mortgage loans. It also provide data base management, due diligence, and securitization services to other lenders.
The new company will be managed by James E. Flaherty, William J. Hatch, and F. James Kehoe Jr.
Contifinancial's purchases are a continuation of a recent growth strategy, and highlight the finance company's newfound interest in nonresidential real estate, analysts said.
In the past year, Contifinancial has bought into at least five small originators, in some cases purchasing them outright, observers said. Typically, Contifinancial first buys loans from a company, then purchases a stake in the company, and later buys the whole company.
Contifinancial did not respond to calls for comment.
First Security and Contifinancial have worked together since June 1994. To date, Conti has purchased $363 million in loans from First Security.
"You could give Contifinancial credit for coining the phrase 'strategic alliance' " said Kevin Spinner, an analyst with Keefe, Bruyette & Woods. "They really stand out in this area."
The strategy makes sense because large companies like Contifinancial command better prices when they securitize loans, and have capital handy for smaller companies that have not been courted by the IPO market, Mr. Spinner said.
Several large finance companies have purchased commercial mortgage companies or their loans in recent months, and activity in the nonresidential lending arena is only going to increase, analysts say.
"A lot of players are interested in the market," said Merrill Ross, analyst with Friedman, Billings, Ramsay. "We've all seen nasty cycles in commercial mortgage, but eventually the wounds heal."
Ocwen Financial Corp., West Palm Beach, Fla., increased its commitment to commercial mortgage lending earlier this year, with the creation of a real estate investment trust. Several other nonbank companies have also made inroads in commercial mortgage real estate in the past year, she said.
Banks are not interested in the more speculative commercial real estate lending that some finance companies do, Ms. Ross said. "They can't really portfolio" those loans, because of regulatory requirements, she explained.
Developments in the securities markets have given commercial real estate more liquidity, explained Mr. Spinner. "There is more appetite for commercial subordinated trauches," he said.
Contifinancial's most recent moves may even make the company a force in creating a secondary market for commercial mortgages, said Ms. Ross.