Are Interest Only Loans the New Norm?
We’ve seen a number of significant developments throughout this economic cycle. As the loan market has become increasingly liquid, interest only loans have become more prevalent. We’ve received a major uptick in the amount of inquiries about these kinds of loans. There are two perspectives driving the trend—borrowers and lenders—each trying to take advantage of market conditions. In the first of a two-part series we look at how the bank, life company, and CMBS loan sectors see things.
Insurance companies have traditionally been the most conservative lending sector, studying default rates from a statistical and actuarial standpoint. Interest only loans tend to have a higher rate of default because there is less principal pay down. Given the higher risk profile of interest only loans, the life company sector is more stingy than the bank and CMBS sectors about offering interest only components to loans. Having said that, because of the current landscape, we have placed many moderate and low LTV loans with life companies that include interest only components.
The competition and demand for loans among CMBS lenders is fierce right now. This means that while Conduit 2.0 lenders in this cycle are more conservative than their predecessors, interest only components and full term interest only loans have become quite prevalent, even on higher leverage transactions. This trend will likely continue into the foreseeable future.
Banks are very active in this cycle, though they are tempered by federal regulators active in this loan sector. Loans with components of interest only are available with these lenders particularly when leverage is low.