NEW YORK CITY—Since the first few securitizations following the CMBS market's near-death experience began appearing in 2009, analysts have observed a gradual re-emergence of patterns that characterized so-called CMBS 1.0 loans. Among them are increasing loan-to-value ratios and a tilt toward interest-only loans.

A recent Moody's Investors Service report, which said the industry has begun to experience “déjà vu all over again,” found that about two-thirds of the CMBS deals originated in the third quarter were IO, compared to 50% of the loans originated during 2013. Similarly, Fitch Ratings found that IO and partial-IO combined represented nearly 60% of the conduit loans issued year-to-date through Q3, up from a total of 33.1% at the end of 2012.

Already in 2011, a report from AAM Co. expressed concern that IO loans were becoming more common. “The lower debt service costs of an interest-only loan make DSCR appear to be more conservative but in reality mask the risk in the underlying collateral pool,” the report stated.

At a seminar on CMBS trends last month, Fitch presented the results of its examination of the performance of IO loans originated between 1994 and 2008. An article in the ratings agency's weekly CMBS newsletter summed up the study's conclusions: “Interest-only loans demonstrated noticeably higher default, severity and loss rates than amortizing loans. This relationship held true even when controlled for vintages. If the 2006-2008 vintages are removed, interest-only loans still underperformed amortizing loans.”

A chart comparing the performance of IO versus amortizing loans during the CMBS 1.0 era tells the story. Fully amortizing loans from between '94 and '08 have had a default rate of 9.6%, compared to 14.6% for amortizing loans, 21.6% of partial-IO loans and 32.3% of IO loans. Loss severities worsened for full IO loans compared to fully amortizing ones: 67.4% for IO compared to 35.2% for fully amortizing.

The CMBS 1.0 chart further illustrates how prevalent IO and partial-IO loans had become during the peak years of CMBS issuance. Removing '06 through '08 vintage loans from the equation leaves all but 156 fully amortizing loans and 27,838 of the total of 33,348 amortizing loans, but leaves just 2,448 of the 7,465 partial-IO loans and 1,604 of the 4,301 full IO deals.

“Partial interest-only loans from pre-'06 vintages performed better than more recent vintage partial interest-only loans,” according to Fitch. On the other hand, the Fitch study found that full IO loans from 2005 and earlier performed worse than IO loans from more recent vintages with noticeably higher default and loss rates. That being said, Fitch notes that many '06 through '08 IO loans haven't reached their maturity dates yet.

The coming wave of maturities could see more IO defaults from these vintages, due in part to the sheer size of that wave. “Over the next three years, more than $300 billion in conduit CMBS loan balance will mature,” Trepp reported last week. “That's more than 2.5 times the amount that matured from 2012 to 2014.”

Interestingly, says Fitch, partial-IO loans were the quickest to default at 56 months after origination on average, suggesting that the change in payment terms may cause some borrowers to default earlier in the term of the loan. Of the partial-IO loans that defaulted, approximately 27% did so before the end of their initial IO period, while the remaining 73% defaulted an average of 28 months after switching from IO to amortizing.

Fitch based its study on 47,443 conduit loans originated between '94 and '08 and totaling $414.5 billion in original securitized principal balance, and examined performance metrics through the end of last year.