The credit quality of CMBS loans appears to be slipping a bit, according to a Moody's Investors Service report Friday.

The company's third quarter review shows credit metrics of conduit loans generally remain comparable to those of 2004, which was one of the last years before the credit crisis, said Tad Philipp, Moody's director of commercial real estate research, in a report on U.S. CMBS credit quality during the period.

But there are some preliminary signs of looser underwriting that are cause for concern, he added.
Specifically, Moody's noted that the U.S. CMBS loan-to-value ratio rose to 95.2% during the period from 93.9% the previous quarter.

Also the report noted that the share of interest-only loans increased and the share of certain loans with funded reserves decreased, although offsetting this was lower leverage in some of the affected loans.

Wider bond spreads also have made it more difficult for conduit loans to compete against balance sheet programs, adding to a growing consensus that issuance in this market has been cooling off.

But Philipp said in the report he believes that the spread widening he attributes to European debt concerns is likely to reverse, so the decline in issuance will most likely be temporary.

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