From January to June of last year, Credit Suisse First Boston (CSFB) was jiggy with commercial mortgage-backed securities, underwriting about $11 billion of the paper. But in late July, it put on the brakes.

"Things were getting crazy," says William Adamski, managing director and co-head of real estate at CSFB. "Spreads were getting too tight, and there was a lot of risk in the marketplace, so we decided to pull back."

The timing was good. The Russian debt crisis hit soon afterward, and the CMBS market collapsed into much disarray. CSFB did manage to do about $1.3 billion in securitizations in September and October, but even Adamski admits his company is basically sitting on the sidelines waiting to see how the market shakes out.

CSFB may be one of the lucky ones. Turmoil in the real estate capital markets, both from debt and equity perspectives, temporarily crippled property markets in the early fall, and some financial players won't re-enter, or will limp back to, the starting gates. Wall Street and its surrogate companies around the nation that powered real estate capital markets all were punished, but some were more humbled than others. Among the walking wounded were WMF Group, Nomura Securities, Chastain Capital, Criimi Mae, AMRESCO, Ocwen Financial and Friedman, Billings & Ramsey.

What happened? Securitization, the pillar of Wall Street's real estate success, suddenly was its undoing. On the equity side, underwriting simply stopped cold this summer. Initial equity offerings totaled about $16 billion for 1998 as compared to $26 billion for all of 1997, reports the National Association of Real Estate Investment Trusts. After the summer, real estate equity underwriting fell off the track.

On the debt side, commercial mortgage backed securities managed to hang tough until September when the virtual collapse of Russia's capital markets touched off a global flight of financial risk of all kinds. The mad rush to dump almost any kind of risk investment brought down even the high-flying CMBS market. Pummeled in both the equity and debt markets, almost all types of real estate advisory work and capital underwriting declined precipitously.

Near the end of 1998, Merrill Lynch reported it was laying off 3,400 employees, but there was no indication that any would come from its real estate investment banking department. Indeed, no investment bank wants to be the first to admit some of its real estate organization will have to be downsized.

The '90s has been the decade for CMBS. Dividing up pools of commercial mortgage loans and reformatting and selling them as securities reached a record volume of $44 billion in 1997, but that mark was already erased by September 1998 as last year's nine-month total reached $56.4 billion. It is estimated the market closed with about $70 billion in CMBS.

From 1991 through the first half of 1998, REIT growth had been outstanding, jumping almost fourfold and market capitalization vaulted from $6 billion to close $150 billion at peak. During the same period, real estate prices enjoyed a period of dramatic recovery. Properties that were purchased at $0.30 to $0.40 on the replacement dollar in 1994 effectively doubled in value by the end of 1997. Whatever dollars REITs could raise, the money was generally well spent. The problem was that kind of growth was not going to last and when REIT stocks began to trade below net asset value or at a multiple that was low enough so acquisitions were not accretive, REITs stopped expansion.

Equity Wounds Friedman, Billings & Ramsey, an investment banking firm based in Arlington, Va., was credited with creating hybrid mortgage REITs, and unique transactions such as taking a company that owned automobile dealership assets public in a REIT format. Over 50% of the firm's income came from underwriting initial public offerings for REITs and specialty finance companies, with another 29% derived from secondary offerings.

Since FBR was so reliant on REIT transactions, when capital raising in this sector halted after mid-year, company business began to bleed. For the first nine months of 1997, the company reported a net income of $17.5 million and a per share net income of $0.44. But for the first nine months of 1998, the company suffered a net loss of $35.4 million and a per share net loss of $0.71. FBR itself noted, "As a result of the company's dependence on the investment banking transactions in the financial services and real estate industries consolidation sector, downturns in the market for securities in these areas have adversely impacted and could continue to impact the company's result of operations and financial condition."

For the first nine months of 1998, FBR managed or co-managed eight IPOs and 16 secondary offerings, raising over $3.5 billion. Among its REIT IPOs were Capital Automotive REIT, Resource Asset Investment, Chastain Capital Corp, and Wilshire Real Estate Investment Trust.

It wasn't just the loss of underwriting business that affected FBR, it also was that the company was exposed to significant after-market risks as it held substantial positions in the securities of these companies as underwriter or market maker. Unfortunately, the market for REITs was absolutely punk for 1998 (-16.30% as of November 30) and in particular for the companies FBR took public. Capital Automotive REIT and Resource Asset Investment were FBR's best performing IPOs. Capital Automotive was down only about 11% and Resource Asset was off about 12%, from their offering price of $15 per share. Meanwhile, Chastain Capital dropped an astounding 70% and Wilshire Real Estate Investment Trust's decline approached 80%.

FBR doesn't expect things to get much better in the near future. More trading losses will adversely effect the company's revenue in the fourth quarter and first part of 1999.

Hybrid & Mortgage REITs One of FBR's children, so to speak, was Chastain Capital, a company that went public in April 1998 through a $110.7 million IPO. Like most other hybrid REITs it went public at $15 a share and toward the end of 1998 was trading below $5. To be more accurate, Chastain is a hybrid debt-equity REIT designed to invest in CMBS, whole loans and mezzanine deals, but after the capital markets turmoil, the company was thumped.

In October, Chastain reported third quarter losses of $38 million. Those losses included non-cash charges of $24 million resulting from marking its investment portfolio to market, $16 million related to interest rate hedges and a one time charge of $500 million for a forfeited deposit on an acquisition that was canceled due to the company's liquidity position. In fact, by the third quarter, Chastain was in default on the tangible net worth covenants in its credit facilities and needed a temporary waiver on its defaults.

In November, the company reached an agreement with Morgan Guaranty Trust and Merrill Lynch Mortgage Capital to restructure its credit facilities and dispose of assets to reduce the size of, and stabilize its portfolio. As a result of the credit facility accords, an affiliate of Lend Lease Real Estate Investments Inc., Chastain's manager, agreed to provide the company with up to $40 million of unsecured subordinated indebtedness in order for Chastain to meet is liquidity requirements.

"The company has stabilized," says a company spokesperson. "What happened with Chastain is no different than what happened with other mortgage REITs."

Take the case of Ocwen Asset Investment Corp., a West Palm Beach, Fla.-based hybrid REIT that invested in underperforming commercial real estate, subordinate commercial mortgage-backed securities, subordinate and residual residential mortgage-backed securities and commercial and residential mortgage loans.

Ocwen Asset was spun out of Ocwen Financial Corp., a $3.5 billion financial institution specializing in the acquisition and management of distressed real estate assets. Unfortunately for both companies, their stock market fates have paralleled and plummeted. Ocwen Financial had traded as high as 30 3/4 during 1998, but tumbled below the $6 range. Ocwen Asset rose to 21 5/8. In November, the company announced it would be terminating its status as a REIT in order to become a taxable C-Corp. The company which had been trading at 5 10/16 at the time took another 26% drop on the announcement.

"The purpose of the change in tax status is that we wanted to use the retained earnings to build up our cash reserves," comments Richard Hurwitz, a vice president of corporate communications for Ocwen Financial. "By retaining earnings, the management has maximum operating flexibility to enhance the property values."

In November, Ocwen Asset also decided to delay payment of its final 1998 dividend. Going forward, Ocwen Asset's focus is that it will still deal in the same categories of assets with one caveat - it will be less active in CMBS.

Dusted Up in Dallas Although its stock price fell 45% from its IPO price of $15 a share, Amresco Capital Trust, a hybrid REIT, didn't suffer the slings and arrows of outrageous fortune as did its compatriots in the field. The same, however, can't be said of its parent company, AMRESCO Inc., a Dallas-based diversified financial services company.

"Amresco Capital had more equity like investments," explains John Pettee, president and COO. "Our goal was to look at structured finance. We make loans, but they have a higher loan to value than you would find with traditional mortgages."

Amresco Capital is going to stay the course, Pettee adds. The company recently set up a $100 million joint venture with an opportunity fund which was one way to raise money in a difficult capital environment. Amresco Capital, which traded as low as $4 climbed back to $10 a share.

AMRESCO Inc. should be so lucky. The once high-flyer experienced a total assault on its share price as the stock that traded at peak at almost $40 a share nosedived to below $2 a share. Although the company still ranks as the country's leading distressed asset manager, the No. 1 commercial mortgage banker and the top producer of VA streamlined refinanced residential mortgages, it was bruised and battered by the financial markets.

Over the fourth quarter, the company closed its AMRESCO Residential Credit Corp. eliminating 129 jobs, closing wholesale and retail branches within its home equity lending subsidiary, closing its bulk\correspondent home equity lending subsidiary, selling its commercial mortgage loans for $936 million and selling $1.4 billion of home equity loans.

In November, AMRESCO expected a fourth quarter loss of $85 million to $95 million, and a full year loss of $50 million to $60 million. By the end of 1998, AMRESCO stabilized all of its operating units and reformulated its game plan. Robert Lutz, chairman and CEO, says he expects this year to be one of "strong operating performance."

By December, the company's stock price had inched its way back into an $8 trading range.

Truly Outrageous Fortune Of all the mortgage REITs, none suffered a worse fate than Rockville, Md.-based Criimi Mae Inc. The company filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy code. In 1997 and through the first half of 1998, Criimi Mae was the largest buyer of non-investment grade commercial mortgage-backed securities.

"The recent turmoil in the debt and equity markets has resulted in a collateral call from our lenders," says William Dockser, chairman of the company. "This has come at a time when it is very difficult to raise additional capital as a result of the volatility in the markets."

Soon afterward, Criimi Mae went on the legal offensive filing lawsuits against Merrill Lynch, Citicorp Securities Inc. and Morgan Stanley & Co. International Inc. It remains to be seen what the outcome will be of that strategy. Meanwhile, the company in the third quarter suffered a net loss under GAAP of $8.7 million, or $0.18 per share as compared to net income of $10 million, or $0.26 per share the year earlier. The company also noted, due to the decline in value of CMBS held by the company, its shareholder's equity tumbled from approximately $702 million on June 30 to $494 million on September 30.

Victims of CMBS Misfortune Two companies of seemingly dissimilar persuasions, WMF Group and Nomura Holding America Inc. had both come to believe in the exponential expansion of the CMBS market. Nomura Holdings, the U.S. brokerage unit of Japan's Nomura Securities, was a pioneer in CMBS, while WMF Group, a mortgage company, came late to the show. Both were crunched when the CMBS market was sucked into the capital markets vortex.

Based in Vienna, Va., the WMF Group began life as a multifamily lender called Washington Mortgage before going public in 1997 under its current moniker. It was a leading FHA and Fannie Mae lender, but also made the decision to invest in the commercial mortgage banking business, eventually buying four commercial mortgage bankers with seven different locations around the country. In February 1998, it created its own conduit. At first it looked like a good idea, as the company did over a billion dollars in its first six months of conduit business, but the good times were over almost as quick as they began.

On Aug. 31, the company announced it would take a $30 million pre-tax loss connected to loans originated by its conduit unit.

Its game plan had been to sell most of $900 million of loans it aggregated in an early autumn 1998 Merrill Lynch-led securitization, but when the capital markets fell apart, "Instead of holding onto our position for a CMBS securitization, we sold most of our inventory in whole loan form to Merrill Lynch and at the same time unwound all the hedges associated with it," explains Shekar Narasimhan, chief executive of WMF Group. "We wanted to put it behind us and move on."

WMF Group is now looking for a strategic partner to take principle risk positions, to be able to hold loans aggregate and manage the interest rate risk until securitization. In return for taking that position, WMF Group is prepared to give up a chunk of the upside.

While WMF Group wants to stay in the business, Nomura Holdings simply left it behind. The irony for Nomura Holdings was that under the real estate lending leadership of the flamboyant Ethan Penner, the company pioneered the business of chopping up pools of commercial mortgage loans and reforming and selling them as CMBS in the early-'90s. Nomura came to dominate the CMBS field and as Penner claimed, made $1.5 billion in profits from 1992 to 1997.

By what the commercial markets giveth they just as easily taketh away. The company reported a $1 billion loss for the six months ending Sept. 30, with most of it coming from the commercial real estate lending operation. Penner resigned from Nomura Holdings' real estate lending unit called Capital Company of America LLC and was soon followed by William Wraith and Mark McGauley, co-chief executive and chief operating officers of Nomura's U.S. securities unit.

In December, Nomura announced it was quitting the commercial real estate lending business.