For Deutsche Bank, there's no shame in coming in third, especially when you're the only Top 3 lender left standing.

Deutsche Bank Commercial Real Estate was the third most prolific lender for the multifamily industry in 2007, at more than $8 billion, according to the Mortgage Bankers Association. It was bested only by Wachovia, now part of Wells Fargo, and Washington Mutual, now part of JPMorgan Chase.

The company's Berkshire Mortgage unit, known as DBBM, accounts for the bulk of that volume through its Fannie Mae, Freddie Mac, and Federal Housing Administration (FHA) programs.

DBBM originated about $2.5 billion in Fannie Mae loans in 2008, down from $3 billion the year before. But the company saw an uptick in Freddie Mac business last year, to $2.3 billion from $1.7 billion in 2007, partly due to Freddie Mac's aggressiveness in the last half of 2008.

Freddie Mac's pricing was inside of Fannie Mae's for much of the second half of 2008, as Freddie routinely offered standard 10-year deals that were 10 to 25 basis points (bps) lower than Fannie Mae. But that gap has closed since early January, as investor interest in Fannie Mae's Mortgage-Backed Securities (MBS) program continues to heat up, ultimately lowering rates for Fannie Mae loans.

“The pricing has flip-flopped in the last month, mostly driven by the return of the MBS market,” says Steve Wendel, managing director of Deutsche Bank Berkshire Mortgage, in early February. “Right now, Fannie Mae's got a decent advantage in pricing, anywhere from 25 to 50 bps today on the fixed-rate product.”

While DBBM predicts a flat 2009 of about $5 billion, the composition of its business is changing. The company has a large pipeline of pooled transactions, which are groups of loans covering multiple properties, for institutional borrowers like real estate investment trusts (REITs) and fund providers.

For the past decade, most large institutional borrowers have favored unsecured credit facilities. But as unsecured debt grows more costly and less available, many REITs are repositioning their portfolios to a heavier concentration of secured credit products such as those offered by Fannie Mae and Freddie Mac.

“We're projecting an increase of pool business primarily with REITs who are replacing their unsecured financing with secured mortgage debt,” says Wendel. “For the past eight years, we've seen the trend go the other way, where the REITs have gone to unsecured credit facilities, and now that trend has been totally reversed.”

The company also is looking to expand several niche product lines in 2009. “We have been a decent student housing lender and a relatively small seniors housing lender, and we're expanding our efforts in those two segments,” says Wendel. “And on the FHA side, we're trying to pick up our skilled-nursing pipeline and even dabbling in their hospital financing program.”

On the horizon

DBBM believes it has an advantage in being a top Fannie and Freddie lender, whereas many lending shops favor one execution over the other.

“Fannie and Freddie clearly differ in terms of pricing and credit, and in the last year, you can't tell from one month to the next who's going to give you a better loan,” says Wendel. “We're very strong with both, and that gives a borrower the ability, any time before rate lock, to switch horses.”

But 2009 will be challenging. The company will focus first and foremost on managing the “watch list” of loans in its portfolio to identify and minimize any potential losses that occur from rising vacancies and declining rents.

“We'll spend as much time this year on risk management and asset management as we have in the last five years,” says Wendel. “The potential for losses is a lot higher this year, and we're going to mitigate that from happening by spending a lot more time on the watch list.”