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Wells Tailors $1 Million - $5 Million Conduit Program

Now that the once-high-flying Wachovia commercial mortgage originations machine has been absorbed into traditionally more conservative Wells Fargo & Co., the combined operation is again actively originating with Wall Street securitization in mind.

And SmallBalance.com subscribers may be encouraged to note that the Wells Fargo Real Estate Capital Markets group now offers a conduit lending program tailored for permanent financings in the $1 million to $5 million range.

Sources familiar with the operation indicate it appears to be exceptionally active amid a relative dearth of such programs. They say key personnel are dedicated exclusively to the $1 million to $5 million program - which the lender deliberately avoids characterizing as "small-balance."

Wells Fargo, which ranked #1 in loan volume among small-balance originators in 2010 according to research from Boxwood Means, Inc., declined to make anyone involved in the program available to discuss it but did provide some pertinent parameters.

The Wells Fargo program offers five- and 10-years terms for fixed-rate loans secured by stabilized office, light-industrial, retail multifamily, manufactured-home community or self-storage properties. These balloon loans generally amortize over 25 years, but Wells will stretch the schedule to 30 for apartments and manufactured-home parks.

Likewise apartments and manufactured-home communities are accorded a meaningful loan-to-value ratio bump: 70 percent vs. 65 for other categories. Ditto for minimum debt-coverage ratios: it's 1.30 times debt-service for apartments and manufactured parks, 1.35x for other property types.

One attractive feature of even small-balance loans originated for CMBS execution: they're typically non-recourse to the borrower, which is indeed that case with the Wells program (standard behavioral "carve-outs" excepted).

Nor are secondary or even tertiary markets much of an issue: this program targets the Continental USA's 200 largest metropolitan areas, with the primary requirement that 50,000 residents live within five miles of the subject property.

Rate spreads as are standard with conduit loans are quoted over comparable-term interest-rate swaps, and logically vary by collateral type, condition, and location; leverage and other loan terms and characteristics; and credit quality.

As conduit lending has started recovering from the astonishing decline during the recession- and credit-crunch-plagued 2008-09 period, Wells has become an active player. The bank originated 43 percent of the loans (by principal dollar) in an approximately $735 million CMBS deal last October, followed by 45 percent of a $1.3 billion deal that went to market last month.

However those transactions weren't exactly peppered with small-balance loans. The October deal's average loans size was nearly $20 million, the February average nearly $26 million.

Which also makes it difficult to peg where the Wells $1 million to $5 million program's interest rates are coming in. Rates of larger commercial mortgages are traditionally 100 basis points or more below small-balance loans with comparable characteristics.

With the October CMBS issue in which Wells participated, the weighted-average coupon (WAC) of the 37 loans factored to 5.71 percent. And with the February transaction's 50 loans, the WAC was 5.495 percent.

Bond spreads likewise tightened over those few months. The recent transaction's longer-term AAA-rated tranches priced at 100 to 120 basis points over swaps, compared to 120 and 135 over with the October deal.

It's unclear whether Wells might look to contribute the $1 million to $5 million mortgages it is now originating and warehousing to upcoming mega-deals, or instead bundle and securitize pools comprised entirely of small-balance loans. These pools have tended to relatively small in aggregate, and are generally offered via private placements rather than through public securities markets.

In any case, the general tightening trend suggests interest rate spreads on small-balance loans originated for securitization have likely narrowed in recent months. But it may also portend more of the aggressive pre-recession conduit lending that continues to plague a CMBS arena with a delinquency rate rapidly approaching double-digits.

Indeed, some noteworthy observers - MBS pioneer Lewis Ranieri included - are now cautioning that conduit lending practices are already becoming dangerously frothy.