Wall St. finances one-fourth of commercial mortgage market.

Wall Street houses, once only interested in aggregating loans in the secondary market for securitizations, are now direct lenders to real estate owners and, in fact, account for as much as 25 percent of the mortgage lending in the United States, reports Pergolis Swartz Associates, one of the largest

One of the motivations of these firms is the huge amount of fees they can generate in securitizations. Because the pipeline of mortgages from other sources has proven inadequate, many have begun their own direct loan programs.

"The issue in the past for the Wall Street firms was always due diligence," said Richard Pergolis, a principal in Pergolis Swartz Associates. "They bought loans through conduits, or set up their own conduits to pool loans for securitizing, but were unwilling to do the underwriting to get through the rating agencies. Today, they've solved this problem in a number of ways. They've outsourced underwriting and due diligence or they've built highly sophisticated inhouse departments to do it."

Pergolis notes that its brokers now routinely have mortgage money available from investment banks and other Wall Street players, as well as past traditional sources such as life insurance companies, pension funds, etc. who have mortgage origination departments. Moreover, they are not only lending mortgage money but investing in equity situations as well.

"Wall Street is making the market today," said Jerry Swartz, also a principal in Pergolis Swartz Associates. "Some are putting out their own capital and keeping the mortgages on the shelf until they do a securitization. Others are waiting to create a securitization pool before they fund. In either case, we're talking about a tremendous volume of dollars for permanent mortgages for stabilized real estate and newly constructed properties. The impact is huge."

The key to the securitization business, of course, is to keep up a big enough flow of mortgages that will bear the scrutiny of the rating agencies to satisfy the demand for such instruments in the bond market. Because the appetite in the public markets for these kinds of securities is seemingly insatiable, there are literally billions of dollars chasing certain kinds of property. In some segments of the market, Wall Street money has all but replaced mortgages from more traditional sources, such as thrifts and commercial banks, especially in the "B and C" property types. It also means that properties which are atypical of the kind rating agencies usually see in securitizations can have a harder time finding mortgage financing as Wall Street players shy away from them.

"It's an interesting situation," summed up Pergolis. "And if this were being done without the discipline of the rating agencies, there would be a large scope for imprudent lending practices of the kind that led to the S&L crisis at the end of the 1980s. But even though there is a huge amount of money coming into the market, it's coming in an orderly and controlled fashion."