An interest only loan is one in which the borrower pays the interest for part of or the full term of the loan, then it is later renegotiated. Recently these loans are increasing as are risks for lenders.
When we review the mistakes made in 2004 to 2007 we assume that most banks and investors will have a long memory and never make those mistakes again. This is usually the case as it is easy to say that we are all rational human beings. Bear in mind that the interest-only commercial loans that we saw in the crisis are now back to pre-crisis levels and it is starting to stand out as it is being reported in the press, so there are growing fears of default.
The data provider Trip (in the FT), reports that interest-only mortgages accounted for 77 percent of the loans backing $16.5 billion of new commercial mortgage-backed securities in the US during the first quarter, this is up from 68 percent from last year. When added to the partial-interest loans, the amount in percentage terms moves higher to 89 percent which is at levels of the crisis. This is surely a red flag that many are starting to point to for reference.
The trend means great risk for lenders but some analysts are saying that these interest only loans are not as risky as they were in 2008. Still, markets will start to price in such negative news so look for more volatility in the coming months.