The banking industry should not hold its breath for a rollicking good time in 2012, as indicated by Trepp L.L.C.’s 2012 U.S. Banking Sector Outlook. The New Year is not expected to provide a flashback to 2008, but it will not bear any resemblance to the glory days either.

It’s been a good year for banks in terms of profits, but the industry can bid adieu to forward progress in that arena in 2012. After two years of earnings growth, banks will earn less next year. In an attempt to offset lost revenue, they will turn to customers by adding new fees and advocating the use of credit cards. However, this plan will only do so much as, according to Trepp, it will add only a nominal amount to non-interest revenue.

From a regulatory standpoint, things are only going to get more complicated and more expensive for banks. With any number of challenges still in place, in 2012 and 2013, bank failures will continue, albeit at a slower pace.

As it pertains to commercial real estate, the banking industry forecast is neither completely gloomy nor blindingly bright. Commercial real estate loan performance is anticipated to slowly but surely improve over the next year. However, stringent lending standards and the continuation of high delinquency rates will continue to prevent a full recovery next year and for quite some time into the future.

$66M for D.C.’s Highland Park Multi-Family

D.C.'s Highland Park

The building, which sits above the Columbia Heights Metro station at 14th and Irving Streets NW, was previously recapitalized by Cassidy for $122 million in December 2010 for Phase I, which was followed by a $26.1 million construction loan for Phase II in September of 2011.

First-Mortgage Refi of $70M for Michigan’s Aldingbrooke Apartments

In a $70 million deal arranged by NorthMarq Capital’s Charlotte and Chicago offices, Allerion Associates L.L.C. has found a refinancing for its first mortgage on the Aldingbrooke Apartments development in West Bloomfield, Mich. Financing was based on a 10-year term with a 30-year amortization schedule. NorthMarq created the arrangement through its seller-servicer relationship with Freddie Mac.

Vestar, Rockwood Capital Secure $50M Loan for Vegas Retail

Vestar, in a joint venture with Rockwood Capital L.L.C., has originated a $50 million loan to finance The District at Green Valley Ranch a 384,000-square-foot retail property just outside of Las Vegas. The financing, supplied by Wells Fargo, sits at a fixed 4.4 percent rate. The two companies paid $79 million for the District asset this past October.

In what Ernst & Young research has found to be the largest European real estate transaction in the current cycle, Kennedy Wilson and its institutional partners have just completed the second phase of a $1.8 billion portfolio acquisition.

The Bank of Ireland was the previous owner of the loans. The first phase of the purchase, which totaled $1.4 billion, closed on Oct. 21, 2011. The remaining $400 million finalized yesterday. A majority of the loans are secured by high-quality, London-based office, multi-family and retail properties.

Mary Ricks, executive vice chair of Kennedy Wilson, chalked up the success of the transaction to her firm’s “ability to source and execute deals quickly.”

Watch Commercial Property Executive for more on this story as it develops.

Scheduled to close in the first quarter of 2012, the transaction comes five years after Morgan Stanley acquired Saxon for $706 million in cash. Upon the December 2006 completion of the purchase, Anthony Tufariello, then global head of the company’s Securitized Products Group, said, “This acquisition is another important step in our long-term strategy of building a global, vertically integrated residential mortgage business.”

As of April, Saxon’s servicing portfolio included upwards of 169,300 loans totaling $29.2 billion in value, Fitch Ratings reported in affirming Saxon’s ‘RSS2+’ residential special servicer rating.  “The company’s strategy remains focused on subservicing of distressed mortgage assets,” Fitch stated in August.

“In 2010, Saxon increased its capacity through sales of mortgage servicing rights and sub-servicing arrangements for its legacy subprime portfolio,” Fitch said. “As a result, Saxon’s current infrastructure and excess capacity have positioned the company for significant growth through its pursuit of subservicing opportunities.”

Prudential Mortgage Capital Co. is bringing a former Freddie Mac executive on board. The latest in a string of departures from the government-sponsored enterprises as the entities await congressional progress on determining their future structure, Michael McRoberts, who had served as vice president & national head of sales and production with Freddie, will spearhead Prudential’s Fannie Mae and Freddie Mac lending business as managing director.

The job seems a natural fit for McRoberts. At Freddie Mac, his home for two decades, he oversaw the lender’s conventional multi-family business and structured transactions as well as managing the seniors housing teams, the national Freddie Mac Program Plus network and four regional production offices. In his new role at Prudential, McRoberts will be responsible for the market-rate Fannie Mae and Freddie Mac portfolio teams and agency production team.

“Mike is an industry leader respected for his deep and broad knowledge of multi-family finance that will be a catalyst for continued growth in our already strong agency lending platform,” David Durning, senior managing director of Prudential Mortgage, noted in a prepared statement. “The last few years have brought tremendous change for all participants in the agency lending business. Adding Mike to Prudential Mortgage Capital’s leadership team highlights our strong commitment to agency lending.”

In addition to his long history with Freddie Mac, where he also once held the position of national head of underwriting and credit for the lender’s multi-family division, McRoberts brings to the table industry experience garnered from his time with First Maryland Mortgage Corp. and First Interstate Mortgage Corp. He will officially join Prudential on Dec. 5.

The departures from the GSEs are producing significant concern among real estate’s financiers, who worry that by the time a decision is made regarding changes to their structures, they will have lost the key talent and relationships that have produced so many successful deals. Others who have bid adieu to positions with Freddie Mac and Fannie Mae since severe financial troubles prompted the government to seize control of the GSEs in 2008. Recent departures have included Michael May, longtime head of multi-family at Freddie Mac; Frank Lutz, vice president for customer management in Fannie Mae’s northeast business center and head of secondary markets; Mitch Kiffe, Freddie Mac’s head of multi-family loan production; and Phil Weber, who headed Fannie Mae’s multi-family business.

For more on the GSE brain drain, including commentary from industry heavyhitters Eduardo Padilla, Shekar Narasimhan and Richard Green, click here to access CPE’s Special Focus: Changes at the GSEs.

A site in Boston’s Chinatown that had been home to 300 before being cleared for the city’s infamous Big Dig will become a residential address once again. New Boston Fund and Asian Community Development Corp. recently secured city and state funds for the construction of a $130 million, 345-unit mixed-income multi-family property, paving the way to commence the initial phase of the project.

It’s been a long time coming–approximately five years of planning involving representatives of entities ranging from community organizations to the Commonwealth–but what had been a bustling residential section of Hudson Street in the 1960s is finally on the verge of a renaissance. Parcel 24 will accommodate residents of various incomes. The property will offer 200 market-rate apartments, 95 affordable apartments and 50 affordable homeownership residences.

However, Parcel 24 will sprout more than just homes. It will also feature approximately 5,500 square feet of ground-level retail space, 6,000 square feet of interior community space and 125 underground parking spaces reserved for the property’s residents.

Financing for the project comes in the form of Federal and Massachusetts Low Income Housing Tax Credits allocated through the state Department of Housing and Community Development, in addition to funds from state and city affordable housing programs. New Boston, acting through its Urban Strategy America (USA) Fund, is contributing to the financing of the project as well.

If all goes as planned, New Boston Fund and ACDC will break ground on Parcel 24 in spring 2012.

General Growth Properties Inc. started 2011 with plans to refinance a few billion dollars’ worth of maturing debt by the end of the year. The mall REIT has completed its task well ahead of schedule with the recent $966 million refinancing of four properties.
Among the malls for which GGP has just secured new non-recourse mortgages is the 1.7 million-square-foot Natick Mall in Natick, Mass., just outside of Boston (pictured).  The REIT refinanced the property, originally developed in 1966, for $450 million. GGP also obtained new debt totaling $200 million on Galleria at Tyler in Riverside, Calif. Located 40 miles east of downtown Los Angeles, the 31-year-old super-regional mall expanded to its current size of 1.2 million square feet in 1991.

First Colony Mall, a 1.1 million-square-foot, 15-year-old property in the Houston suburb of Sugar Land, Tex., was refinanced to the tune of $185 million. And a new $131 million mortgage is in place for the 1 million-square-foot Northbrook Court, a 35-year-old mall near on Chicago’s North Shore in Northbrook, Ill.  GGP owns a 50 percent stake in each of the assets.

The refinancings provide GGP with two highly valuable benefits: time and money. Together, the four new non-recourse loans have a weighted average term of 9.1 years and an average fixed-interest rate of 5.1 percent, marking a notable decrease from the prior 5.81 percent average.

Between April and September, GGP completed the refinancing of 14 malls at a total of $2.56 billion, and with the addition of the four most recent transactions, the REIT has wrapped a total of approximately $3.9 billion featuring a 5.1 percent weighted average interest rate. “At the start of 2011, one of GGP’s stated goals was to strengthen the company’s balance sheet and liquidity while also reducing interest rates and extending the average debt maturity profile,” CEO Sandeep Mathrani remarked. “We have accomplished our 2011 goals and are now focused on 2012 financing opportunities.”

The achievement comes less than a year after GGP emerged from Chapter 11 bankruptcy in Nov. 2010.

Sabal Financial Group L.P. has purchased a portfolio of more than 100 commercial real estate loans from a leading Midwestern bank. Secured largely by retail, office and industrial assets, as well as land, the group of performing and non-performing loans is valued at $153 million.

The assets serving as collateral are located in regionally diverse states, including Illinois, Wisconsin, Arizona and Florida, where a bevy of properties secure the distressed loans. Sabal’s purchase comes two months after the financial services management firm relieved a major Midwest bank of a $212 million collection of performing and non-performing loans secured mostly by income-producing commercial real estate properties and land in Florida, Illinois and Wisconsin.

“The need for banks to clear their balance sheets of problematic loans remains strong and this latest portfolio acquisition is representative of our ability to assist,” said Sabal CEO R. Patterson Jackson (pictured). Six bank failures last month brought the total for the year to 74, according Trepp L.L.C. Commercial real estate loans were largely to blame, accounting for 82 percent, or $365 million of the financial entities’ aggregate $445 million in non-performing loans, Trepp reported.

Sabal will provide loan servicing and asset management for its newly purchased portfolio, as it does with the portfolio acquired in August. “Our team’s real estate and banking expertise is significant and we are able to work out and enhance the value of these real estate assets more effectively than the banks, which are confined by regulations,” Jackson said.

Starwood Property Trust has revealed its participation in a commercial mortgage loan securitization that recently closed. Deutsche Bank Securities Inc. led the deal, to which Starwood contributed four first mortgage loans featuring a principal balance totaling $154.4 million.

“We are pleased that the high quality of our loan portfolio enabled us to complete this important CMBS market securitization despite the extreme volatility in the capital markets,” Barry Sternlicht, chairman and CEO of Starwood, said. “The successful closing of this transaction significantly reduces the size of our mortgage loans targeted for sale and further supports our strategy of focusing on finding safe, attractive returns for our shareholders over the long term.”

A group of properties encompassing hotels, an assisted-living facility and an office building secure the subordinate debt investments retained by the company, which allow for an effective cost of funds of roughly 5.1 percent. The weighted average remaining maturity for the debt investments is 55 months.

As part of its risk management pursuits, Starwood is using securitization to, as the commercial real estate finance concern notes in its second-quarter earnings report, “better match the maturity of our financing with the duration of our assets.” In the first quarter of this year, the company contributed three loans with a carrying value of about $54 million to a securitization trust, which resulted in proceeds of $56 million. And in the second quarter, the sale of a loan to an independent third party yielded $78.4 million in gross proceeds.

As this issue went to press, the debate over the federal debt ceiling raged on, coming down to the wire as congressional high-stakes battles so often do. A possible failure to strike a deal by the Aug. 2 deadline raised the specter of an unprecedented default on the nation’s debt, a spending freeze, tax hikes and severe budget cuts. Meanwhile, out of the spotlight, progress on another vital front was moving even more slowly, and while the sluggish efforts to resolve the future of Fannie Mae and Freddie Mac may pose a less imminent hazard to the country than a national default, some argue that the delay is already damaging the mortgage markets.

Indeed, as Eduardo Padilla, CEO of NorthMarq Capital and a CPE editorial advisory board member, wrote in a recent post on our From the Inside experts blog, the uncertainty has already produced a steady stream of departures from the GSEs. Head of multi-family Michael May’s departure from Freddie Mac after 28 years, effective July 15, came on the heels of a key Fannie Mae departure: that of Frank Lutz, formerly vice president for customer management in the agency’s northeast business center and head of secondary markets. An 18-year Fannie Mae veteran, Lutz joined private commercial real estate lender and servicer Berkadia Commercial Mortgage L.L.C. on July 11. Those moves were only the latest in a series that in the past couple of years has included the exits of Mitch Kiffe, Freddie Mac’s head of multi-family loan production, and Fannie Mae multi-family leader Phil Weber, in both cases after logging close to 20 years of service.

In March, following a series of key departures, Federal Housing Finance Agency director Edward DeMarco told a conference of the Global Association of Risk Professionals that something must be done to keep experienced, highly qualified executives at the GSEs. Even as the brain drain continues unchecked, however, a decision over the future of the agencies appears to be as far away as ever. Lawmakers are introducing bill after bill, each one seeming to propose bigger changes than the last. But the House Subcommittee on Capital Markets and Government-Sponsored Enterprise has yet to schedule a vote on any of them, as Dees Stribling pointed out in a recent article on cpexecutive.com. Hardly encouragement for top talent to remain in place!

What is the best solution? Suggestions range from full privatization to tighter government control. The Mortgage Bankers Association is recommending a middle course, as MBA’s chairman, Michael Berman, discussed in our May issue’s Visionary Q&A. Real estate finance veteran Shekar Narasimhan weighed the viability of a private model in a recent From the Inside blog entry.

While the GSEs’ multi-family practices are a big concern for the commercial real estate industry, they constitute only a small percentage of the agencies’ total business, and so are unlikely to drive Congress’s decisions by themselves. But the far more volatile state of the single-family market offers an even stronger incentive to seek stability, despite Washington’s reluctance to rush to judgment.

Talent retention is a sensitive area, given past criticism of GSE executive compensation levels, which far exceed those of most government agencies. But with virtually universal agreement over the importance of retaining the current level of talent, the urgency of reversing the executive exodus surely calls for action.

For specific commentary on this subject, log on to www.cpexecutive.com/finance/mortgagebanking/changes-at-the-gses.

This column first appeared in the August 2011 issue of Commercial Property Executive.