A recent report into the bridging market, penned by EY Financial Services, articulated some interesting features of the current short-term market that bear a little more thought. According to EY’s analysis, growing competition in the bridging market ‘requires lenders, particularly newer entrants, to be more flexible to borrowers in terms of product terms…to build a market presence’.
They gave the examples of longer-term products, higher loan-to-values and accepting more diverse property types as security. Coupled with the longer times to foreclose on loans and ongoing economic uncertainty, exacerbated by the unresolved Brexit negotiations, they are of the view that the frequency of stress cases in the bridging market will likely rise this year and into next. We have already seen a very public demise for a number of short-term lenders – Lendy being the most recent to be taken into administration.
It is hard to disagree with EY’s perspective – a rise in risky lending will give rise to more arrears, more possessions and more borrowers out of pocket. Yet, I’d argue that this in itself shouldn’t be considered an outcome that is necessarily bad. Let me explain.
Bridging was traditionally an unregulated market focused largely on short-term lending to professionals looking to add value to developments for resale or let. These individuals cannot and should not be bracketed in with everyday consumers, including those using regulated bridging to fund a gap between the purchase of their new home and sale of their old one. Yet increasingly the language in the bridging market is confusing these lines – and it is really unhelpful.
Consumers must be protected and it is right that short-term funding to homeowners, where the roof over their heads is at risk, is fully regulated and adheres to the same rigorous standards of affordability as the mainstream term mortgage market. But investors taking a commercial decision – and yes, sometimes even punt – on whether to use short-term finance to fund a development project want and ought to be treated as businesses.
The loss of a project could mean the failure of a company; it is unlikely to mean the loss of that investor’s own home – unless the security is made up of a blend of properties; in which case, that case should fall back into the regulated bracket. Yet the blurring of lines between regulated and unregulated bridging is forcing the market away from underwriting unregulated bridges purely based on the quality of security. Increasingly, funding restrictions have set impractically high standards on borrower status – even in the unregulated sector.
I am not arguing for higher and higher LTVs, nor am I suggesting that lenders throw cash at properties that would struggle in the resale market. But I do think there is an unhealthy aversion to risk developing in this market. Unregulated bridging is non-status lending for a reason – that is that the underlying security is paramount. Good lenders know the key is getting your money back – it is this that should guide lenders’ criteria, not the whims of finance lines lacking in the practical experience of underwriting deals.