Moody's: IO Loans Surge in CMBS

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 from 7% in the first quarter of 2003, according to the rating agency.The rating agency is concerned about the trend, which it says "creates a credit issue for investors." Sally Gordon, a Moody's analyst, said 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. Borrowers could also face problems at the time of refinancing if interest rates are higher, the rating agency said. Therefore, Moody's said it sees the possibility of balloon default and believes that the increase in IO loans could affect CMBS performance for several years. Moody's can be found online at http://www.moodys.com.