Investors in bonds that packaged $62bn of debt for US offices, hotels and shopping malls are bracing for more loan defaults through 2010 as Bank of America Merrill Lynch says landlords’ monthly payments may jump 20 percent or more.

Principal is coming due on the so-called partial interest- only loans as an 18-month-old recession saps demand for commercial real estate. About $179bn of such loans were written between 2005 and 2007 and bundled into bonds, according to data from Bank of America Merrill Lynch.

With soaring vacancies and falling rents, some cash- strapped borrowers will fail to cover the higher costs, said Andy Day, a commercial mortgage-backed securities analyst at Morgan Stanley in New York. About 87% of mortgages sold as securities in 2007 allowed owners to put off paying principal for several years or until maturity, compared with 48% in 2004, Morgan Stanley data show.

'The worst is yet to come,' MetLife Inc. Chief Investment Officer Steven Kandarian said yesterday in a Bloomberg Television interview. 'Typically there’s a lag between when the economy softens and when the defaults actually occur.'

bloomberg.com