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Ninefold Jump in Commercial IOs.(interest-only loans)(Moody's Investor Service)
New York -- Interest-only loans have jumped to about 66% of all commercial mortgage-backed securities loans rated by Moody's Investors Service in the second quarter, up from their 56% share during the first quarter and 7% share for the first quarter of 2003.
Moody's also reports that leverage on CMBS loans has gone up to 100.5% during the second quarter, the first time it has exceeded 100%.
Of the second quarter IO loans, about 60% were IO for a part of their term, while 40% were IO for their entire term.
The credit rating agency is concerned about this trend, which "creates a credit issue for investors."
Sally Gordon, a Moody's analyst, said, "The issue for investors is that CMBS pools with more IO loans inherently have less margin for error to allow for underperformance in the supporting collateral."
This is because IO loans have little or no amortization, which would normally reduce the principal balance of the loan as it pays down.
Also, at the time of refinancing, borrowers could face problems if interest rates are higher, impeding their ability to refinance.
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Source: HighBeam Research, Ninefold Jump in Commercial IOs.(interest-only loans)(Moody's...