Bridging finance industry during covid-19 pandemic

Lender-broker loyalty is a two-way street: 'We all need to support each other'

While some lenders were purporting the standard communication as is always the case during a time of uncertainty: 'it's business as usual', brokers have been urging lenders to "print reality" in order to gain long-term respect.

“I think the message should be ‘open for business’, but not ‘as usual’,” said Nicholas Christofi, managing director at Sirius Property Finance.

It is known that many lenders have scaled back their LTVs as a result of having to rely on AVMs, desktop or drive-by valuations, due to surveyors being on lockdown.

This is an unforeseen time where lenders will need to protect their position, but brokers — who typically don’t get paid until the deal completes — are likely to see a dip in revenue over the next couple of months after they have sorted their pre-coronavirus deals, and therefore need clear messaging about what is still available so that they can manage expectations for their clients and themselves.

Is there enough transparency as to what bridging lenders are currently offering (or not offering) in the market?

So far, we have seen a mix of lenders announce they have temporarily halted lending, others have communicated they are still actively lending with revised criteria (predominantly in terms of capped LTVs and reduced maximum loan amounts), some are reportedly funding on a bespoke case-by-case basis or scaling back the number of deals they are focusing on to keep transaction timescales relatively normal, while others are said to be purporting BAU and then cherry picking deals.

“It is clearly not ‘business as usual’,” argued Nick Verstage, owner at 1st Business Finance. “A number of lenders have closed their doors, others have reduced [their] LTVs, and [some] have said, ‘If you want to draw down now, the rate will be higher, or you [have to] wait [until] the situation is over.”

Once the initial ramifications of lockdown were understood in the community, lots of lenders posted regular updates with regard to changes to their practices, in addition to finding solutions to problems, such as AVM, desktop or drive-by valuations, or even physical inspections where properties are vacant.

“We have also seen lenders willing to accept and continue to process applications to offer [without] valuations, [with completions] subject of course to valuation,” said Danny Robinson, director of commercial at Grey Matters Specialist Lending.

Unfortunately, a lack of concrete lending criteria industry wide seems to be driven by no one knowing how long the lockdown period (and the aftermath) will go on for.

“I accept lenders cannot change their products, as [they] may [have to change them] again the following day,” Stephen Burns at Adapt Finance pointed out.

Jo Breeden, CEO at Crystal Specialist Finance, agreed, stating that, in such a volatile situation, it was seeing new lending criteria come and go “literally every hour”.

“Of course, as we go forward, the [sector] will start to calm down and lenders will be able to make decisions based on a clearer market view but, up until that point, we cannot pretend it is ‘business as usual’, so we have to talk.”

Nicholas added that it was understandably “very difficult” to stick to a product guide in this market, as things are changing on a daily basis.

“Lenders need to be clear that each deal will be looked at on its own merit; if they are able to do this from the outset, then I don’t see any real issues.”

If lenders are in a position to revise their terms and appetite, this should be translated to the industry as soon as possible so that brokers can place the correct deals to match their requirements, and should also include clear details on the types of assets they will lend on.

“This would allow for fewer issues and a smoother process [during a time when], let’s face it, tensions are quite high,” commented Liam Keighley, director at Laybourne.

“As a market, in general, the silence is deafening.

“It’s like the door is open, but people are switching the lights off and running out the fire escape.”

“I appreciate transparency,” said Sam O’Neill, senior finance broker at Clifton Private Finance.

“That’s not necessarily shouting good news for all to hear and glossing over the bad news — that is full disclosure, warts and all.

“This allows our advice to be carefully considered and accurate.

“Too many lenders are professing for it to be 'business as usual' but then having a long list of changes in the small print.”

During this time, every update is important as, ultimately, brokers are advising their clients with regard to lenders’ service and timescales and, if they are incorrect, it is the brokers who are held accountable.

Piragash Sivanesan, founder of Totum Finance, believes lenders are trying their best but, if they wish to pause or pull lending, there needs to be more discussion around the reasons why, and how the sector can overcome issues.

Peter MacAllan, director at Development Capital Solutions, doesn’t think there has ever been enough transparency regarding the source of funds in the bridging market. “It’s always been a bit cloak-and-dagger to me,” he said.

“I suspect some lenders are not be being fully transparent with brokers regarding the exact status surrounding their source of funds.”

Adam Brand, group sales and operations director at Life Bridging and Commercial Solutions, also urged bridging lenders to be honest and truthful about their funding positions.

“We fully understand that they need to pull back, and that some may be in potentially vulnerable positions.

“However, it is during these challenging times that the relationships built up between broker and lender are vital for ensuring strong positioning when the market returns.”

Stephen added that it worked with lenders which had all reacted “realistically”, and had allowed the brokerage to manage its own and its clients’ expectations in the short term.

“We do not engage with lenders who we do not feel we can build a relationship with and it is that relationship which ‘keeps it real’,” he stated.

Liam said that some lenders were fantastic with regard to communicating their stance.

“Octane and Glenhawk, to name a few,” he confirmed, and noted that BDMs were on the phone explaining exactly how they were assessing deals and what they could and couldn’t consider.

Andrew Robinson, CEO at Arc & Co, said that it was difficult for lenders to give any certainty, and it depended on which market they were operating in.

B&C caught up with Andrew over Zoom, to find out more.

Good and bad practices

Now is a good time for lenders to be utilising their marketing teams and efforts to get real-time, honest messages across to their broker partners on what they are able (or unable) to offer them.

Issuing terms, with no real understanding if they will be applicable further down the line is said to be a problem, along with lenders posting on LinkedIn that they are open for business, only to then respond to emails saying they won’t look at deals because of the current climate.

Other issues that market experts have told B&C include lenders with loans in the pipeline but who are not returning emails or calls; accepting new business when there is no intention to lend until market conditions have stabilised; and changing terms to the detriment of the client.

One broker claimed it had seen some lenders doubling and tripling their pricing, for example.

“This allows them to say they are still lending, but the reality is that the pricing makes it unviable,” argued Niall Brown, managing director at Auxilium Real Estate.

“This is not just decreasing LTVs for risk,” said Andrew, “it’s more about [price] increases.”

One thing the industry will be keeping a close eye on is the approach of lenders if their existing loans go over term — considering there is currently a ban on repossession proceedings from the FCA  — and their position on default interest if borrowers are unable to refinance.

“Lenders will need to take a view on this and, as long as the borrower has conducted themselves in the right way throughout the term, a conversation must be had,” added Nicholas.

The best lending partners are said to be those that are continuing to be open and have a good grasp of the issues — even if they are not lending — and are considering ways in which they can proceed.

Some have also been looking at valuations where the valuer isn’t on their panel, to put forward solutions.

Steve Pollard, senior bridging and development finance consultant at FinSpace Group, felt that some BDMs – who are at the coalface of the broker community — have worked really hard to adapt to the changing environment.

“We have seen a lot of lenders do their utmost to service the deals that are on their books or complete on deals that are at the latter stage of legals. 

“This ensures that they deliver on their promises to clients even though they have lowered LTVs or stopped taking new business on.”

“Swift and transparent communication with revised lending criteria is a great practice I am seeing,” added Peter. 

The outbreak has also resulted in more lenders being open-minded about new and innovative ideas — especially around fintech.

We have seen developers launch virtual tours with real-time sales staff talking prospective buyers through properties, potentially extending to surveyors, and even looking at drones.

“It does make me wonder why, in a time of uncertainty, lenders are jumping to do things above and beyond their usual remit,” pondered Sam.

 “…Why were they not offering these more advanced products (AVMs and electronic signing of documents in particular) before, in a confident market, but are happy to offer them now in a time of less certainty?”

Many lenders have introduced new ways to get around problems and it will be interesting to see if these will be here to stay once we are out the other side — whenever that is.

Chris Fairfax, managing director at Catalyst Property Finance — which has recently started using AVM, desktop and drive-by valuations — explained that the reality of the current situation was that loans were taking longer as a result of conditions taking more time to satisfy, due to many third-party information suppliers working remotely.

For example, the provision of building control sign-off for work on a property.

“This requires the property to be inspected and this action is difficult right now, so sign-off certificates might be delayed.”

However, solutions will need to be devised, and Chris outlined how it organised for a remote inspection by building control to provide a sign-off certificate so that a loan could fund. 

Basically, its borrower was able to show the outstanding works to the building control inspector via video.

Catalyst is also using video conferencing technology for legal documents to be signed, and is applying more leniency with regard to who can witness.

Other positive observations include how the industry has become closer, with some fantastic charitable initiatives.

“...What Christian [Gugolz, BDM] at MT finance is doing by getting the whole industry to raise money and concentrate on other things to keep us sane [is] brilliant,” commented Liam, referencing Christian's 'Isolation Golf Bucket Challenge'.

Liam also mentioned that there were BDMs making daily calls and outlining changes that brokers should be aware of and, more importantly, just checking in to see how they were doing.

“That is a massively positive thing and one I am truly grateful [for].”

“This isn’t about business; this is about being human, which means so much more.”

Lender-broker loyalty: it’s a two-way street

During these unparalleled times, the industry needs brokers and lenders who can keep a calm head and appreciate that all parties in the transaction chain are having a tough time.

However, those without a clear strategy may find it difficult to gain support once the market recovers.

Trust is always hard earned and easily lost,” highlighted Piragash.

“We have had lenders pull out of deals in the last few days but, to their credit, there has always been an open dialogue, which allows the broker and the client to consider alternatives,” he added.

“Lenders do not consider the impact on clients and brokers will ultimately tarnish their brand.

“I doubt it would cause me to exclude a lender from business, but it would make me cautious, as the credibility of any future offer will be influenced by previous actions.”

Liam said he would be “greatly” influenced to use certain bridging lenders in the future, as a result of how they are reacting to the situation.

“The lenders that are being honest about their stance and allowing us to manage our clients’ expectations which, in turn, allows us to keep our business going, will see a huge volume of business from us in the future,” he confirmed.

“The lenders that are ignoring calls, emails and not shouting a message out loud are inadvertently saying they don't care about us or our clients and, for me, that is a huge kick in the teeth.”

He added that lenders that were continuing to purport 'business as usual', yet declining cases, were giving brokers “whiplash”.

“We would much rather they just put their hands up and say, 'Hold fire, we need to manage our existing pipeline.'

“The way Together and Roma have come out and said they are not entertaining new applications is actually refreshing and a great message — they clearly value their brokers.”

Andre Bartlett, director at Capital B Property Finance, claimed that some lenders had been let down unfairly by their funding lines and were “struggling to stay afloat themselves”.

“I would like to think the good relationships we had before this started will continue after normality has returned.”

Danny said that there would “definitely” be a change in the way brokers view certain lenders amid their handling of the current crisis, “but we should not forget that lenders have been impacted by the very same thing,” he added, “for them, it is not as simple to find immediate solutions.”

Sam told B&C that, when the market eventually picks up, he would rather go to a lender which has put all business on hold and been completely open about it, than a lender which has claimed to be ‘business as usual’ to get the deals in, hitting numerous stumbling blocks in the hope to keep the deal when everything returns back to normal.

Mark Posniak, managing director at Octane Capital, added that it was times like this that showed the true nature, or quality, of a relationship between businesses.

“Lenders and brokers who respect one another will cut each other slack and find a way over the hurdles that will inevitably arise in the weeks and months ahead.”

Nicholas added that the way a lender conducted itself in this market would definitely be key to relationships moving forward — but the same goes for brokers.

“If brokers don’t conduct themselves in the right way now, then you could find lenders refusing to work with them in the future.

“It works both ways, which is why communication and managing expectations from the outset is of the utmost importance — we all need to support each other.”

Paresh Raja, CEO at Market Financial Solutions, said that it was “crucial” for people to remember that this was a big change for everyone, which had driven new ways of working “almost overnight”.

“It’s key to remember, at this time, that people will be dealing with the situation in different ways, and stresses will be different for both lenders and brokers.”

Chris Treadwell, relationship manager at Avamore Capital, said that, to get through this period, it was more important than ever for brokers to work together with lenders.

“This means having more transparency around transactions and an acknowledgement that what was possible one month ago may not be possible for the next few weeks.

“Temporary changes in criteria are driven by the costs of capital in global financial markets that have reacted badly to the spread of Coronavirus, and the consequent restrictions that have had such a practical impact on the whole of the property industry.”

Right now, borrowers will need vital funding to continue with their projects and will be chasing their brokers for answers, and lenders will be trying to navigate risk and may need to move goalposts as a result.

Duncan Kreeger, founder and CEO of TAB, stressed the importance for brokers and borrowers to recognise the need for lenders to carry out enhanced due diligence during this period.

“At TAB, we have employed experts in each sector, so we are doing a lot more of our own DD which, yes, leads to a little more time being needed,” he explained.

“With so many lenders currently on the bench, it’s hard to accurately underwrite one’s ability to refinance and, again, this can take more time to understand.

“Pricing risk is not an easy task right now.”

What can the broking community do to help their clients and lender partners?

“Now, more than ever, is a time for leaders and cross-stakeholder initiatives,” stated Piragash.

Steve Pollard added that, from the lender side, it was fundamental that brokers did everything possible to solidify any exit plans to make sure the loan performs as expected.

“At FinSpace, we have already created an extra level of research and due diligence with all our cases that we continue to present to our lender partners, which we hope will help all parties in this uncertain period.”

Peter felt that brokers would do well to educate their clients that, in the short term, they will need to put more cash into their deals, as a result of lower LTVs available.

“It’s about managing your clients’ expectations and giving them the best advice you can, given the current circumstances. 

“We [are] in a market of reduced liquidity, and cream rises to the top — what I mean by this is lenders will select the deals that give them the best risk-adjusted returns.”

This could mean lower LTVs, higher coupons, and an improved security package, such as a higher level of personal guarantees and secondary security.

Interestingly, Niall said he was increasingly noticing borrowers calling, just to just get a sense on how the lending market is operating.

“This informs whether they want to risk trying to acquire assets regardless of how good a deal they are getting.” 

Liam said that brokers should try and stay calm and understand that, for any lender, this is a “scary time”.

“It is possible to plan for a downturn in the market, but impossible to plan for a widespread pandemic like Covid-19.

“Processes have to adapt and everyone is tense — the way you treat your lenders now is a reflection of your business and won't be forgotten when the market resumes to a level of normality, which it always does.”

One broker predicted that, over the next few months, lenders will cut down who they deal with, and restrict it to long-term, proven relationships.

“Brokers who infrequently place cases may be pushed to more experienced brokers, which would be a good long-term benefit to the industry, anyway,” stated Stephen.

A prudent approach to lending should be expected and is central to the survival of the market, as no one knows how the economy will fare, what the rate of unemployment will be, and how much it could reduce property prices.

Mark said that everyone had to be tolerant and understand that a lender’s processes may not function quite as normal — all the more so if staff are ill or having to look after their children.

“We are in the middle of a global pandemic and businesses are understandably in a state of flux, with things changing by the day,” he stated.

“The brokers you have a good relationship will understand if criteria and broader risk are adjusted slightly, and if things take a little longer due to events outside your control.

“In fact, if criteria and risk weren’t changing, then that would be a red flag in itself.

“The failure of a lender to be slightly more cautious in the current climate is, arguably, reckless.”

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