Industry News

Standard & Poor’s warns of loose standards in commercial lending

Flood of liquidity into interest-only loans cited

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Deteriorating underwriting standards, high loan-to-value ratios and interest-only loans aren't issues confined to residential mortgage lending. Analysts at Standard & Poor's Ratings Service say they are concerned about those trends and others in commercial mortgage-backed securities (CMBS) and collateralized debt obligations (CDOs). The "vast majority" of loans in commercial MBS and CDOs are interest-only for part or all of the loan term, which greatly increases refinancing risks if interest rates rise or property values are not sustained, Standard & Poor's warned. Lenders are also seeking to make more loans secured by esoteric collateral and construction loans, and relaxing requirements for capital expenditures, tenant improvement, and leasing commission reserves. "While these trends were more exceptions to the rules in the past, they have now become standard practice," Kim Diamond, managing director in Standard & Poor's Global Real Estate Finance Group, said in a statement. Lenders...