George E. Emmons Jr. has ambitious growth plans for KeyCorp's commercial real estate lending division.

By the end of 2002, the executive vice president and national manager of the division wants to build up its commercial mortgage servicing portfolio to $7 billion, from less than a billion last year.

Last month, Cleveland-based KeyCorp took a big step toward achieving Mr. Emmons' goal by buying National Realty Funding, a big St. Louis originator and securitizer of conduit loans. National Realty was one of the largest servicers of commercial mortgages, with some $3.4 billion. The acquisition brought KeyCorp's servicing book up to $4 billion.

Mr. Emmons was among the 4,566 executives angling for position in a challenging real estate market at this week's Mortgage Bankers Association commercial real estate convention in Orlando. (See story, page 8.) KeyCorp rented not one but two hospitality suites at the expensive Walt Disney World Swan and Dolphin Hotel, where the convention was held.

Mr. Emmons said KeyCorp officials at the meeting assured National Realty's 25 or so correspondents that "nothing changes" as a result of the merger. He said he told them that KeyCorp only wants to help "grow and develop the correspondent relationship."

Having a large servicing business gives KeyCorp's real estate operation "a new revenue source" to complement the interest income that comes from its loan portfolio, Mr. Emmons said. The banking company holds $6.6 billion of commercial real estate loans on its balance sheet. It originates about that much each year, but much of its originations are either securitized or syndicated.

KeyCorp also has the distinction of being a participant in Fannie Mae's Delegated Underwriter and Servicer multifamily program. DUS lenders make loans on apartment buildings and retain some of the risk on these loans even after they sell them to Fannie. In return, these lenders are paid a juicy servicing fee that is five times the fee paid to servicers of conduit loans.

DUS is an exclusive club; there are only 27 participants, and KeyCorp is only one of two banks on the list. The rest are mortgage banks. KeyCorp has an edge over most of the others, Mr. Emmons said, because as a portfolio lender it can use its balance sheet as "a short-term parking lot" for construction loans that can eventually be refinanced into multifamily mortgages. Indeed, multifamily loans represent the biggest slice of KeyCorp's construction loan portfolio, Mr. Emmons said.

Aside from servicing, Mr. Emmons wants his division to increase the fee income it gets for advising clients on mezzanine and equity financing. And he is very hopeful that last year's financial modernization act will open up all kinds of possibilities for banks in real estate. These could include entering property management and leasing, owning title companies, or making equity investments with the bank's capital, he said.

Key's 463-employee real estate department wants to be "all things to a select group of clients," Mr. Emmons said. By "select" he means professional developers with seven to 10 years of experience. Their deals don't have to be Trump-sized; most of the deals KeyCorp finances are in the range of $3 million to $30 million.

To be sure, this year KeyCorp faces a challenging environment for commercial mortgage originators. Higher interest rates combined with cyclical factors have made it harder for lenders to find business. On the plus side, real estate itself continues to perform well. In most local markets, Mr. Emmons noted, there is "good equilibrium" between supply and demand, and low vacancy rates.

He credited this to the public debt and equity markets, which in recent years have exerted much more influence on the property markets than in the 1980s. The agencies that rate commercial mortgage-backed securities and the equity analysts that follow real estate investment trusts are "vigilant" in monitoring the quality of loans and investments, he said.

"We didn't have this kind of discipline 10 years ago," when reckless overbuilding led to a real estate recession, Mr. Emmons recalled. Though it may have appeared a few years ago that lenders and investors were becoming aggressive again, the financial markets correction of late 1998 "snapped things back."

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