Traditional lenders are not currently willing to use brokers because of the lack of funding through traditional channels. Lenders are finding it difficult to manage their direct businesses. In the medium-term, the current shake-out in the broker market will end and there will be fewer brokers. The best investments in technology or niche services will bring the greatest returns. The internet has changed the broker market but there is no guarantee that all businesses will become electronic. There will be opportunities for traditional brokers in niche markets, but not all. Bridging lenders in the UK are filling in the gap left by traditional lenders. However, they must set their criteria to be comparable to the exit lender. When assessing a deal, the bridging lender must keep in mind that exit lender’s loan-to-value ratio of 65%.
Fraud – although bridging lenders don’t have a guaranteed bottomless pit, that doesn’t mean they are less risky. Bridging loans can be short-term and are therefore not risk-free. A pot of PS10,000,000 can be lost by fraudsters, unscrupulous brokers and clients who pass on dirty business that cannot be redeemed. Bridging lenders must also repay investors. If they don’t get their money back, they will pull the plug. The European crisis wasn’t a sudden event. It was a result of investors losing faith in different markets, creating a complex web that exposes countless risks. I’ve seen banks with strong business models and high profits go out of business due to withdrawals of funding arms. These were due to perceived risks as real. The herd mentality of investors makes it more important than ever that you eliminate all risk from your business. While we cannot control the Euro crisis, fraud is possible to virtually eliminate. The best lenders are taking steps to eliminate 99.99999% fraud. A fraud rate of one to two percent could be achieved by increasing the number of bridging lenders in the market. This will lead to diminishing returns and can cause funding to stop. Although technology can be helpful, having the best people available and the most efficient procedures can almost eliminate fraud. Some lenders fail to have all these things in place.
Regulation – While regulation is generally good for consumers and the market, regulators sometimes overreact. The Dodd Frank Act, which is a US law that prevents many new businesses from being established, can sometimes cause financial markets to be hampered by regulators. Recent FSA comments suggested that clients shouldn’t be charged interest upfront. It is easy to see why they argue this. This seems to be in response to some irresponsible brokers who have made the sector look bad. I believe that removing the money upfront is a benefit to all parties.
- Investors get paid when bridging lenders are paid their interest.
- The client proves that they are able to afford the mortgage.
- Because the client has already paid all their interest, it makes it easier to exit.
The client can exit a bridging loan with a rate of 3 – 6% rather than 15 – 30%. This allows them to avoid losing everything that they have worked so hard for.
The FSA should look into this. It will benefit everyone by stabilizing the market and making it more available to lend to more clients. The FSA should not deduct the interest upfront as it will prolong the pain of bad debt, which can lead to clients being denied loans and tie up funds in the market that need short-term financing at minimal risk. Bridging loans were designed to solve this problem. Without them, the market would be plagued with bad debt and have less money to lend. A rate of 3 to 6 percent versus 15 to 30% is equivalent to the difference in paying PS30,000 per annum for a PS1,000,000 loan, instead of PS300,000. Customers will be treated better, clients will have more options to exit, lenders and investors will have less bad debt, and there will be more money to lend. This is something that I am sure the FSA will agree with.
