"Leverage Going Way Up" In Commercial RE
The National RE Investor web site lets us in on a disturbing trend; interest-only loans for commercial property. "As of January 1, 55.8% of all fixed-rate conduit loans featured IO periods—up from 5.9% at the beginning of 2002. And 35.6% of these loans are IO for the full term, according to an analysis by Moody’s Investors Service."
"A few IO loans wouldn’t be a problem, but frothy loan underwriting has swelled the total dollar volume to $800 billion of the total $1.7 trillion in commercial mortgage debt at year-end 2004. Here’s another factoid for your catalog: That $1.7 trillion is a staggering 14.4% of U.S. gross domestic product. The last time that commercial mortgages accounted for more than 14.4% of the economy was during the late 1980's, and everyone knows how that ended."
Who in their right minds would finance commercial deals this way? "'What does the guy originating the loan really care?' says a source from one of the largest loan servicers in the nation. 'The borrower needs the interest-only loan to make their returns work, and it may not really be a problem for years. This is an extremely competitive business.'" A quote to remember.