GMAC's Road to the Top.

Capital is not an issue for GMAC Commercial Mortgage. This subsidiary of General Motors has been on a buying spree of late. Its position as the industry's top commercial servicer seems secure in a business where size definitely matters.

IF IT'S ONE THING GENERAL MOTORS CORPORATION UNDERSTANDS, IT'S THE WORD "BIG." The world's largest automobile manufacturer is also the nation's biggest commercial mortgage banker.

While the Detroit-based carmaker can toss up some imposing numbers--such as $130.5 billion in revenues and $4.8 billion in net income through the third quarter of 1999, making it arguably the world's largest corporation--it is no longer the imposing giant it once was. Targeted by unions, burdened by high manufacturing costs and challenged by legions of other automakers, its once-dominant share of the auto market has steadily eroded.

Yet, the same cannot be said of GM's much smaller commercial real estate mortgage subsidiary, GMAC Commercial Mortgage, Horsham, Pennsylvania. In the world of comercial real estate finance, GMAC Commercial Mortgage is fast becoming the behemoth that GM once was in the automobile world. It is the No. 1 commercial mortgage servicer, and it could possibly end 1999 as the No. 1 originator as well.

In the bumpy, turbulent world of commercial real estate finance, where major servicing, finance and lender participants come and go unpredictably, the only sure thing has been the ascension of GMAC Commercial Mortgage. In 1999, when the issuance volume of commercial mortgage-backed securities (CMBS) dropped from $78 billion to approximately $65 billion, GMAC Commercial Mortgage reported its best year ever. In 1998, it boasted $9 billion in originations. By the end of October 1999, the company's origination volume already had topped $10 billion.

"If you look at the players in the industry," says Charles Dunleavy, president of GMAC Commercial Mortgage Corporation, "GMAC Commercial Mortgage would stand out as the one that has the financial wherewithal and the global presence to make it a pretty tough competitor."

When you have a parent company the size of General Motors standing behind you, it's easy to do the things--such as acquiring smaller companies--needed to prosper in the contentious commercial mortgage banking industry.

Since it was carved out as a separate unit in 1994, GMAC Commercial Mortgage has been on a buying spree. In 1995, it picked up $8 billion in servicing contracts and the 13-office Republic Realty Mortgage Co., Chicago; in 1996, it purchased $6 billion in servicing contracts as well as special servicer Hanford Healy Co., San Francisco; in 1997, it took over a servicing portfolio of $9 billion; and in 1998, it bought Mortgage Analytics, West Hartford, Connecticut; McCracken Financial Software, Billerica, Massachusetts; and Newman & Associates, Denver.

Last year [1999], was, perhaps, GMAC Commercial Mortgage's busiest. Joining the fold were real estate appraiser Bristol Realty, Mesa, California; broker dealer Quantum Financial Corporation, Northfield, Illinois; and commercial mortgage banker Dannatt & Co., Houston. It also picked up servicing acquisitions of $15.4 billion, almost all of which came in one deal--the April purchase of Mellon Mortgage Co.'s $14 billion commercial mortgage servicing portfolio.

While it might be argued that recent deals didn't have a direct effect on GMAC Commercial Mortgage's record origination year, the achievement was a result of the collective synergy of the acquisitions. "Some of the previous acquisitions were finally fully integrated," says Karen Nee, GMAC Commercial Mortgage's executive vice president.

An organizational chart of GM would show General Motors Acceptance Corporation (GMAC) as a direct subsidiary to the parent company. Underneath General Motors Acceptance would be the $2.3 billion GMAC Mortgage Group, which is divided into three units: GMAC Mortgage (residential mortgage banking), Residential Funding Corporation (residential mortgage securitization) and GMAC Commercial Mortgage Holding Corporation. The latter was reorganized as a holding company in 1999 to accommodate its diverse businesses: GMAC Commercial Mortgage, McCracken FSI, Newman Financial Services Inc. and Realty Services International.

"We formed the holding company because we had different types of businesses that support each other," explains David Creamer, president and chief executive officer of GMAC Commercial Holding Corporation, "Newman is a broker dealer, not a mortgage company, so it didn't make sense to have them as part of GMAC Commercial Mortgage. And McCracken, a technology company, does work for other companies, so it had to be set up on its own."

The holding company also works because Creamer, as he says, doesn't believe in "managing the hell out of [it]." Creamer sets guidelines, helps put business plans in place, supports the acquisitions and lets them grow on their own--a pretty good mantra from a tough manager.

Creamer, for all practical purposes, pushed and pulled GMAC Commercial Mortgage into its current position of dominance. In the early 1990s, when commercial real estate was still reeling from overbuilding and recession, Creamer could easily have opted to jettison the company s commercial mortgage unit that, at the time, had just four offices and a $5 billion loan servicing portfolio. A contrarian, showing considerable foresight, Creamer instead chose to force-feed the business, picking up portfolios and companies when others wanted out.

In 1994, the staff of GMAC Commercial Mortgage consisted of fewer than 90 employees. Today, says Nee, there are 1,500 employees. The company has grown so quickly that it has overrun its corporate offices in Horsham, Pennsylvania, just north of Philadelphia. Currently, the servicing operation takes up space in three connected buildings plus another 25,000 square feet for support in another office. Soon, however, the corporate, administrative and technology departments will move close by, to another 100,000-square-foot office that is being refit for the company. Servicing will remain where it is.

GMAC Commercial Mortgage also boasts regional servicing operations in Chicago and San Francisco. The latter city is headquarters of the company's asset management function, while Chicago is the headquarters of the firm's master servicing group.

"We are in three businesses," says Creamer. "Servicing, originations and asset management. Everything we do feeds those three businesses, and they are all intertwined. Our theme is to be the best in all those businesses, and every piece we add is to support one, two or three of those businesses."

One part of the business helps the other, concurs Dunleavy. "While 1999 wasn't as tumultuous a year as 1998, spreads have come in, and that is making it difficult for people that don't have the diversity that we do. We have a $75 billion servicing portfolio that not only provides a steady source of income, but a tremendous amount of refinance deals come out of that."

Midland Loan Services, Inc., owned by PNC Bank of Pittsburgh, ranks as the second-largest commercial loan servicer after GMAC Commercial Mortgage, and as Tim Mazzetti, an executive vice president at Midland, notes, "GMAC has an inherent advantage because of its huge origination machine. They are a significant lender plus they have been an aggressive acquirer of loan servicing portfolios, so they don't have to do a lot of third-party servicing."

It can be said that GMAC Commercial Mortgage is also in the technology business, with the acquisition of Mortgage Analytics and McCracken.

Creamer continually seems to fine-tune the operations, creating GMAC Commercial Mortgage Securities, Inc., in 1995; creating specialized health-care and hospitality lending units in 1996; unveiling programs for construction lending, correspondent lending and equity-investment programs and introducing an Equipment Finance Group in 1997; and forming a strategic alliance with Bank One Corporation in 1999, in which it will provide commercial mortgage banking resources and capabilities through Bank One offices in 13 cities.

Lending

In 1994, when GMAC Commercial Mortgage was formed, it did less than one-half billion dollars in origination volume. By 1995, the total jumped to $2.1 billion, and, as noted, 1999 was already at a record-level $10 billion at the end of October. Those loan originations were widely scattered throughout the property sectors, with 32 percent going to multifamily, 25 percent to health care and hospitality, 15 percent to retail, 14 percent to office and the remaining 14 percent to other types of property ventures.

"We are getting an increasing share of the market," says Dunleavy, "as some of our acquisitions, such as Newman, have really come up strong, and we have been aggressively managing our sales force this year, setting goals for branch offices and individuals. Plus, we are becoming better recognized in the industry."

GMAC Commercial Mortgage was one of the companies that Uniprop, a Birmingham, Michigan, equity investment company, reviewed when it was doing a large financing back in 1998. After doing a beauty contest with 10 different sources, Uniprop chose GMAC Commercial Mortgage for $158 million of first-mortgage loans on a portfolio of manufactured home communities.

"Sometimes, when the process becomes ugly, everyone leaves the table with a bad taste in their mouth--but that was not [the case] with this situation," recalls Paul Zlotoff, chairman and chief executive officer of Uniprop. "When we had an issue--and they always come in a financing of this magnitude-GMAC Commercial Mortgage always worked to find a solution, as opposed to telling us why it was our problem. I give them high marks, and we'd be happy to do business with them again."

In 1998, GMAC Commercial Mortgage acquired Newman & Associates, an important player in the tax-exempt and affordable housing multifamily arena. "The experience and capability of Newman has proven to be a very nice fit for GMAC," notes Mitchell Kiffe, vice president of Multifamily Loan Production at Freddie Mac. "For example, Newman will do the investment banking on the bond credit terms of a deal, and GMAC's commercial origination branch office will do the mortgage banking side."

In 1999, GMAC Commercial Mortgage will end up as Freddie Mac's biggest originator in the multifamily lending segment, and in the realm of tax-exempt bond-credit enhancement, No. 2. The two companies will probably end 1999 with about $1.5 billion in business in the multifamily lending sector. "We have expanded our programs and GMAC Commercial Mortgage has significant origination capacity, so it was a very nice alliance," says Kiffe. "They have a lot of origination [and] technical capacity in their organization to finance multifamily properties, so it was a natural fit."

An example of Freddie Mac and GMAC Commercial Mortgage working together is a 1999 refinancing of two apartment portfolios in which the two companies credit-enhanced $225 million in tax-exempt bonds and conventional mortgages.

"GMAC Commercial Mortgage is a very strong organization, and they have a lot of different capabilities in commercial real estate finance," says Kiffe. "They tend to be very innovative in their capital markets execution, proprietary lending programs and origination programs for others."

There are also other, more subtle, reasons for GMAC Commercial Mortgages' origination growth. "We are in a changing environment," says Creamer. "For instance, the insurance industry is consolidating and some companies like MetLife are going public. When you are in that arena you have all sorts of scrutiny you don't have if you are buried in a big corporation. We have a great advantage of being essentially unregulated. Those areas [insurance] are constantly under regulator scrutiny."

The company also runs a great network of production offices and has that servicing portfolio from which it can build business.

What else can you do when you're part of a big company? Take some risks. The company did 10 securitizations in 1999, with a total value of about $4 billion. "We have an advantage," says Creamer, "in that we can hold the subordinated classes. We created a B-piece fund earlier this year. We thought it would take i8 months to get under way; in fact, it took six months and there is over a half-billion in B-piece, subordinate-class paper in the fund. We are looking at creating a second fund or expanding the first."

GMAC Commercial Mortgage can also afford to experiment. This year, instead of trying to mix health-care deals in with the normal conduit transactions, it securitized them as a stand-alone package. "The last health-care deal we literally did a couple of days after our CMBS," says Creamer, "and the credit actually traded a few basis points closer to the CMBS."

GMAC Commercial Mortgage loans have good credit quality. According to a study by Deutsche Bank Securities, the default rate for the company's $5.3 billion in conduit originations was only 0.10 percent--the best in the industry. On a total-loan basis (842 conduit loans), the default rate was 0.36 percent, which put the company in the top third of all conduit lenders.

"If you just focus on conduits," says Dunleavy, "the trend is consolidation. Eventually there will be just a half-dozen major conduit originators. Some probably will be a few Wall Street firms, and others will be non-Wall Street, such as GMAC Commercial Mortgage. The way we are organized, [and the fact] that we are not regulated, gives us an advantage even over the commercial banks."

Servicing

With a servicing portfolio of about $75 billion, GMAC Commercial Mortgage is far and away the giant in the business. The second-largest servicer, Midland Loan Services, is somewhere back in the $40 billion range, according to the Mortgage Bankers Association of America (MBA).

The question is, is it too big? Obviously, GMAC Commercial Mortgage doesn't think so, but it is trying to segmentize to make sure different sectors get the specialized treatment that each part of the industry may demand. "You deal with hundreds and thousands of mortgage investors and almost what can be called a set of businesses within businesses," says Barry Alan Moore, executive vice president of GMAC Commercial Mortgage. So one of the things GMAC Commercial Mortgage has done in response to the large volume is to carve out a special sector--for example, for life company business, as well as for Fannie Mae, Freddie Mac and Ginnie Mae. "We are almost like a federation of small businesses with specialties depending on the customer," says Moore. A developer with a $400,000 loan would get a small loan specialist, while the investor seeking a $100 million loan would go to the large loan specialist.

Even with all its attempts to create more manageable response units, Moore says he is still "shocked at how positive the feedback is with our customers." On top of that, the mortgage servicing unit received Standard & Poor's highest ratings for servicers.

In fact, GMAC Commercial Mortgage has managed to pull the perfect trifecta in regard to servicing; Standard & Poor's awarded the company a strong" rating for commercial loan, master and special servicing--an unusual, if not unique, feat, says Kim Betancourt, an S&P analyst. In regard to commercial loan servicing, Betancourt's report, "Structured Finance Servicer Evaluation: GMAC Commercial Mortgage Corporation," notes the ranking is attributed to the "company's experienced and dedicated management team, efficient mortgage servicing operation, superior procedures, stringent internal controls, strategic global expansion and excellent computer system."

Betancourt also credits GMAC Commercial Mortgage with doing an "excellent job" of becoming a major player in the master servicing arena by "emphasizing internal controls and proactive risk management, using innovative methods."

As a primary servicer, the company does client relations, payment processing, investor reporting, IRS reporting and lease reviews. Master servicing tasks include trustee reporting and subservicer monitoring. Finally, as special servicer, it performs workouts, foreclosures, default management, cash administration and asset duplication. Its servicing portfolio, broken down by investor types, shows 59 percent of the portfolio securitized--11 percent for institutional investors and 9 percent by the Federal Housing Administration. The remaining investors are Fannie Mae, GM dealerships, Freddie Mac, GMAC Commercial Mortgage itself (for resale) and various others.

Moore admits the margins in the servicing business are very slim--so thin that it is occasionally more prudent to say "no" to deals. "Sometimes the best deals you do are the ones you passed on, and we have passed on some that did not make economic sense. I think some of our competitors haven't been able to say no," he says.

In servicing, one not only needs the bulk to attain economies of scale, but also the technology (to attain those economies) must continually be kept current. Increasingly, bankrolling the scale and the necessary technology has become too expensive for moderate-sized loan servicers. The recently acquired portfolio from Mellon Bank Corporation was handled by 160 people at the bank, but when GMAC Commercial Mortgage took it over, 40 employees did the same work--the difference being technology and economies of scale, according to Moore.

"In this business, in order to survive you have to be able to commit resources and have a strong parent with corporate capital to invest," says Moore.

The commercial loan servicing industry has become an oligarchy, adds Midland's Mazzetti. "There are only five to six companies going after third-party business and all companies are large in size, doing $20 billion to $70 billion," he says. "Five years ago, the largest player was a mortgage banker doing $10 billion."

International

Moore adds that his group is looking now for transactions in Europe; to support that initiative, an operation is being established in Dublin. "We will do a lot of back-office servicing--probably take loans from the States and farm that work to Ireland. Get people trained over there, get the technology in place and do some transactions we are bidding on,' he says.

GMAC Commercial Mortgage already has an office in France with a platform there for servicing, loan origination and asset management.

"GE has a presence in Europe; so does Morgan Stanley, J.P. Morgan and all the main household names for the States working on securitizations," says Moore. "I don't think they really want to be in the servicing business for CMBS transactions. We could be up in the servicing business very quickly by buying the servicing or buying unrated pieces."

The company claims it has three or four more acquisitions--both servicing portfolios and companies--in the hopper, and some of those are overseas.

Elsewhere, the company has made some loans in Mexico and this year it kicked off a conduit operation in Canada.

In 1998, GMAC Commercial Mortgage opened an office in Tokyo called GMAC Commercial Mortgage Japan KK, and one year later it was named back-up servicer on Japan's first publicly issued mortgage-backed securitization. In August, the Tokyo District Court selected GMACCM Japan KK as the sponsor for reorganizing the Japan Asset Management KK. By the end of 1999, GMAC held a servicing portfolio of $2.5 billion in Japan.

The company has looked elsewhere in Asia as well, but as Creamer notes, "The opportunities in Japan are so great, we have been reluctant to go elsewhere in Southeast Asia. We really look at this from an opportunity point of view. We had the skill set in asset management in this country. Japan clearly needed asset management help, so we exploited our knowledge by sending some of our people to Japan. That has generated some nice revenue for us, and we have since expanded our servicing and lending business there."

International business allows GMAC Commercial Mortgage to ride the different waves of the real estate cycle. While the United States is clearly close to the top of the market in valuation, Japan has been bouncing along the bottom. The potential for more business may be in places like Japan. "You expect to see revenues shift as economies shift," says Moore.

Technology and the Internet

Technology is critical to the servicing business, Moore says. "We are spending a lot of time and a lot of money on technology. Clearly, we get great efficiencies out of our servicing operation, and the size of that portfolio does not hamper us or slow us down. In fact, it allows us to afford the technologies that, normally, most folks couldn't afford. Therefore, we have a low-cost platform that generates nice returns."

GMAC Commercial Mortgage's commitment to technology was demonstrated two years ago when it went out and acquired Mortgage Analytics, an analytical engine, and McCracken Financial Software, a commercial mortgage software company. In September, McCracken began offering its mortgage servicing system, Strategy, on a service-bureau basis. Basically, the service bureau would take care of security, system messages, backup and archiving and period-end processing; at the same time, clients could access data from their desks.

"GMAC Commercial Mortgage's excellent automated environment contains superior computer systems and support staff," notes S&P's Betancourt. "The servicing functions' primary system is McCracken Financial Services Inc.'s Strategy servicing package, which performs all of the loan servicing functions."

Even with all its talk of being a technology company, GMAC Commercial Mortgage has approached the Internet gingerly. Although the company had a Web site for the past two years, it's really been nothing more than a noninteractive billboard. In December, the Web site was upgraded to the extent that a client can log on to the system and get information about a loan or, if the client has a line of credit, he or she can draw down or pay back.

Originally, GMAC Commercial Mortgage had gone with a sophisticated phone system by which an investor or borrower could call in for information on a loan electronically--information such as the loan balance, escrow balance and when the last payment was made. The upgraded Web site gives clients an Internet alternative.

What GMAC Commercial Mortgage hasn't done is create an interactive e-commerce platform on which potential clients can arrange for loans through the Internet. So far, its only move in that direction has been to join some multilender sites such as LoopNet. Dunleavy hints, however, that the company will be heading toward becoming a true Internet lender. "What we are focusing on is building an e-commerce business, and part of that business is being where people can find you and, more importantly, once they find you, we can deliver the best execution," he says.

To which Creamer adds, "There is a lot going on in technology and it is changing the way we do things. We can either ignore it and hang on to what [we've] got, or we can try to lead--and [what] we intend is to lead."

So far, GMAC Commercial Mortgage has become the leader in the key measures of the business--origination and servicing. Whether it becomes the industry's e-commerce leader as well remains to be seen.

Steve Bergsman is a freelance writer based in Mesa, Arizona.