Key Assets: Clear-Eyed Executives like E.J. Burke Helped Guide KeyBank Real Estate Capital Smoothly through the Turmoil of Recent Years. Now the Bank's Commercial Real Estate Finance Group Is Growing Again and Posting Profits
Bergsman, Steve, Mortgage Banking
In 2005, E.J. Burke was asked to take over the real estate finance unit of Cleveland-based Key Corp. Officially, he would become executive BBI vice president of KeyBank Real Estate Capital (KBREC), the same position he holds today, but * H the official title has morphed into something larger--executive vice president and group head of KeyBank Real Estate and Corporate Banking Services. * The longer title has been well earned because Burke, who also is vice chairman of the Mortgage Bankers Association (MBA) and immediate past chairman of MBA's Commercial Real Estate/Multifamily Finance Board of Governors (COMBOG), successfully guided KeyCorp's real estate finance group through what some are now calling the Great Recession. That downturn has been particularly cruel to both residential and commercial property sectors. * Despite all the challenges, KeyBank Real Estate Capital not only survived but stabilized early and, starting in 2010, has been on a growth track. It has been one of the real success stories in a sector of the economy that has seen few successes over the past five years. * The reason KBREC came back much faster than most rivals was because KeyBank realized quicker than most of its competition--including other banks, Wall Street investment firms and life companies--that the bubble economy was deflating and decisive action needed to be taken immediately.
An early test
It all started soon after Burkes professional promotion in August 2005. The very next month would bring his first managerial test; the executive who ran KBRECs Income Property Group requested a meeting with Burko. The company had limits in place for condominiurn construction lending, and the manager said to Burke: "You need to go to the chief risk officer and get that limit raised."
Burke had only been on the job a month. He looked the man dead in the eye and coolly answered, "I'm not sure I'm going to do that, hut I will take a look."
Burke did as promised--he took a look, traveling to South Florida to see for himself what the high-rise condo market looked like.
"It was apparent to me the market was overbuilt," Burke recalls. "1 said to my guy, 'Not only are we not going to raise the limit, but I want to stop lending.'"
One of the problems when it comes to real estate funding is that lead times are very long. It took KeyBank until the first quarter of 2006 to close out its high-rise condo commitments, and by that time more tremors started to shake the sector.
"In 2006, we started to have concerns with our funding for home builders, so we slowed lending and tightened underwriting. But even doing that, we had about $8 billion in commitments to for-sale housing," Burke says.
Then by the next year, the financial world started to fall apart, but no one really knew how bad it was going to get. The subprime crisis hit with full force in 2007, which at first glance was a residential real estate problem. However, as Burke distinctly remembers it, in July 2007 his commercial real estate finance world began to feel the tremors as well.
"We had been an active originator of commercial mortgages for securitization and we had a large exposure in our ware-house [loans closed but not yet securitized, loans committed to but not yet funded]," Burke says. "We would do a mark-to-market every day and at the end of July we had for the first time a negative mark. Up until that point, we had a profitable business going."
KeyBank decided to shut down new originations and bring down exposure. Again, not something that happens quickly, as KeyBank had in excess of $2 billion in commercial mortgage-backed securities (CMBS) funded or committed to that it had to wind down.
Remember the condominium and for-sale housing lending business? In July 2007, the bank had commitments of $8 billion to the sector. …