When turmoil in global markets forced Wall Street investment banks to turn off the money spigot for commercial real estate loans this summer, Wells Fargo Bank kept its teller windows open for business.

The nation's seventh largest commercial bank, buoyed by $196 billion in assets and a conservative underwriting strategy, is taking advantage of the ills besetting deal-a-minute real estate financiers like Credit Suisse First Boston, Lehman Brothers and Nomura Asset Capital (now Capital America).

In short, there looks to be a changing of the guard among the largest players in the commercial mortgage-backed securities (CMBS) business. Investment banks, stung by mounting losses and burdened by huge warehouses of loans they can't sell, are getting out of the game. Commercial banks like Wells - the "old school" lenders to the commercial real estate industry - are stepping back in.

"We always believed that the CMBS market was going to be a commercial bank business," says J. Edward Blakey, division manager of Wells' Commercial Mortgage Origination unit. "Our objective is to be among the top two or three originators of CMBS product. We believe that the recent shift in the marketplace will put us within those ranks."

For Blakey, that translates into CMBS volume of between $3 billion and $4 billion a year, depending on the overall size and health of the market.

The goal doesn't seem too far-fetched considering the San Francisco-based bank's track record. Wells' CMBS origination activity jumped from $392.6 million in 1997 to more than $1.3 billion in the first half of 1998, according to Commercial Mortgage Alert.

Ranked No. 20 last year in CMBS activity, Wells is currently ranked No. 8. Only one other commercial bank, Citicorp, tops Wells on the list, and that may change soon. In September and October, deal volume more than doubled as borrowers who are being shut out by other lenders come knocking on Wells' door.

In addition, the Nov. 2 closing of the bank's merger with Norwest Corp. of Minneapolis bolsters its real estate operations. Combined, the two banks have 13 regional loan offices and a strong origination strategy that combines internal and external sales channels.

"We have a tremendous opportunity to grow," Blakey adds.

Founded in 1852, Wells Fargo stagecoaches traversed thousands of miles of the American West to deliver cash and mail. The stagecoach symbol would seem to be an anachronism in today's high-speed digital culture, but the bank clings to the Wild West icon as representative of its steady, reliable and conservative approach to lending.

Conservatism extends to real estate That culture certainly extends to the bank's commercial real estate arm. Blakey is a 15-year Wells veteran who oversees the day-to-day operations of the bank's real estate lending and securitization business. He is never going to be mistaken for the embattled "rock and roll" real estate financier and fellow San Franciscan Ethan Penner, and that's OK with him.

Blakey arrives at his San Francisco office at 5:30 in the morning. There's nothing flashy in his appearance. On one fall morning, he's wearing khakis and a vest layered over a casual button-down shirt. His office contains a desk, credenza, table and a few personal touches. The blinds are drawn on his windows, but the view from his building is not spectacular compared to some of the lofty executive perches found routinely in San Francisco.

Blakey doesn't like to criticize any of his brethren in the CMBS business by name, but he doesn't pull many punches when it comes to describing how the CMBS market stumbled into its current malaise.

"Do we blame the investment banks for the current situation? No, that's what free markets are all about. But do we think that there was aggressive, irresponsible lending going on? Absolutely," he says.

The reason that Wells is still in the CMBS market and many investment banks are not boils down to a borrower's vs. a trader's mentality, he believes.

"We have developed a real estate practice that is based on relationship, borrower-oriented underwriting as opposed to a transactional, can-you-make-the-deal-work approach. Sometimes it's frustrating because we haven't been able to compete on volume with some of the larger lenders, but we made a conscious decision to forsake volume to maintain our higher standards," explains Blakey.

A majority of Wells' commercial mortgage origination falls in the $1 million to $50 million range. The product type is plain vanilla. A list of recent closings is dominated by refinancings for mid-sized apartment buildings, industrial and office properties and neighborhood retail centers. The bank is comfortable with average loan-to-value ratios of between 65% and 75% and maintains strict standards for minimum debt coverage and operating cash flow.

"Despite the fact we're originating these loans for sale, we take a long-term attitude. Our historical approach to lending has been to book a loan and own it all the way through to completion," says Blakey.

"We would not do a CMBS loan just because we thought we could sell it. If we would not be willing to own a loan through maturity, we will not do it. That's the big distinction, at the end of the day, between a commercial bank like us and Wall Street investment banks."

This conservative approach is what has allowed Wells to stay open for business and has won it kudos from borrowers.

"As the rest of the CMBS lending environment crumbled, we expected Wells Fargo to crumble as well, but Wells Fargo stood firm in their commitment to closing our deal with the committed spread and loan amount," says Glenn Ercole, senior vice president at MacKenzie Commercial Real Estate Services.

That sentiment is echoed by James Lemos, senior vice president at Keystone Mortgage Partners in Austin, Texas, who was surprised that Wells did not try to retrade his loan application despite widening spreads.

"This kind of follow-through is rare in today's environment," he says.

Downturn does affect Wells Despite the rosy outlook, Wells is being affected negatively by the downturn in the CMBS market. Blakey says the bank is carrying a warehouse of loans on its books, and the value of that loan portfolio has dropped.

But without giving specific numbers, he says the bank's exposure is small compared to the investment banks.

"Wells has a huge balance sheet, unlike some of the more thinly capitalized conduit operations. We don't have a gun to our head forcing us to sell when the timing is bad," he insists.

Luck also played a part in Wells' good fortune. In June, the bank joined Morgan Stanley to sell a $1.1 billion CMBS offering. The spread on the AAA, 10-year notes was 80 basis points, allowing the bank to clear most of its warehouse and most likely turn a profit, according to Commercial Mortgage Alert.

Two months later, the CMBS market was in the dumps. Global market turmoil forced investors to flee to the relative safety of Treasury bonds. Any investors in the CMBS market were demanding higher yields, forcing CMBS originators to sell at a loss or keep the loans on their books.

Capital Co. of America, the largest and most aggressive real estate lender in the market, hasn't brought a CMBS offering to market since March. And while spreads have tightened recently, it's still no picnic out there. During the first week of November, Bank of America Corp. priced a $1.6 billion CMBS pool with a spread of 155 basis points for its AAA, 10-year tranche.

Blakey expects the CMBS market to continue to improve slowly as global markets stabilize. The underlying real estate markets are still in balance, despite worries of overbuilding in some cities like Dallas.

"This is not a real estate problem, it's a capital markets problem," he says.

But whether or not the investment banks and other conduit lenders jump back into the market is not clear. Considering the losses being taken in the industry right now, Blakey doubts whether they will ever dominate the way they did in the past two years. That leaves an opportunity for commercial banks, he believes.

"We've positioned ourselves as a bank that is reliable in the market. We'll be here in good times and bad." *