The past couple of years have witnessed a remarkable evolution in the way real estate has been financed in both the residential and commercial sectors. The availability of institutional capital and the recent relative stability of the real estate market have resulted in Wall Street's insatiable appetite for a wider variety of real estate products.

This is evident by the proliferation of commercial loans being originated by Wall Street conduits. The conduits' aggressive, nonrecourse loans for midsized and larger properties are more attractive to borrowers than traditional financing.

The residential sector has also been impacted by the revolution on Wall Street. Markets which barely existed five years ago have opened up to homeowners and purchasers. A perfect example of this is Wall Street's expansion beyond A-credit into BCD credit loans. And now, an increasing number of mortgage bankers are becoming the favored source for small commercial loans.

Small commercial loans have been considered somewhat of an "ugly duckling" in the mortgage banking world. Commercial lenders prefer to focus their attention on a more profitable $5 million regional mall than a $500,000 local retail strip mall that includes two or three residential units. Undoubtedly, the relative time profitability ratio is skewed in favor of larger loans. And economies of scale typically have restricted Wall Street from dipping below the $2 million mark. Therefore, industry specialists feel that small commercial loans of between $200,000 and $1.5 million have fallen to residential mortgage companies by default. The residential loan originators, however, do not view them as "ugly ducklings" but as a very viable profit center to supplement their residential deals.

Small commercial loans represent a very natural evolution for the residential mortgage companies. Most of these firms began with primarily good-credit residential applicants and then expanded to include people with increasingly risky credit histories. When clients without a big bank of Wall Street relations approached residential mortgage lenders for small commercial loans, the residential mortgage bankers recognized new opportunities and did their best to accommodate their customers.

Customers prefer working with the residential mortgage companies because residential mortgage companies can offer more personal relationships, better service and faster turn around than the big commercial banks, financial institutions and Wall Street firms.

The expansion of residential mortgage company services into commercial loans - large and small - is going to be the next frontier in this industry. However, it is going to take a new breed of mortgage banker to succeed in this new arena. The underwriting and funding of these products requires the discipline, training and experience of commercial lenders, but it will also take the local origination presence of a residential banker.

To strike this unique balance of local presence with a national sophistication for underwriting and funding, Hampstead Financial established its Commercial Lending Division, which includes a small loan program financing of between $200,000 and $1.5 million, in November of 1997. Since its formation earlier this year, the program has handled everything from small hotels and motels, apartment buildings with five to 10 units, strip centers and a variety of mixed-use properties.

Hampstead underwrites and funds loans itself. The division's loan officers are specialists familiar with the complexities of the commercial market: a big plus in attracting business. In the division's first 100 days, it closed $50 million in loans.

This remarkable success indicates that Hampstead is filling a void in the mortgage industry that has been in existence for some time. The owners of a small strip mall do not want to get lost in the machinations of large Wall Street lenders. They are looking for the personalized, quality service that companies like Hampstead can provide.