Bridging risk and failure

Bridging risk and failure



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In a “normal” lending market, better properties will gravitate towards traditional lenders leaving the inferior ones for secondary or tertiary lenders.  Of course in the current climate, with many mainstream lenders shying away from property lending this may not apply.

By Benjamin Tobin, Director at Strettons, Chartered Surveyor, Registered Property Receiver.

Bridging lenders take risks and are rewarded by returns.  The nature of bridging lenders is to be entrepreneurial; they lend to those who the traditional lenders might refuse, and/or they will move much more quickly.  They take advice from professionals who are used to making quick and hopefully accurate assessments but at the end of the day, the time for making investigations is limited and many lending decisions will be based on the lender’s judgement of the property, and equally, the borrower.

If the lender never gets the prospect wrong he is probably not lending enough.  If he rarely gets it right then it is a short term issue so not for consideration here.

In my Fixed Charge receivership practice I come across a lot of problem properties and it is clear that the problems are more common in bridging loan defaults than in more traditional property lending.

I would identify the following causes:

The quality of the property
In a “normal” lending market, better properties will gravitate towards traditional lenders leaving the inferior ones for secondary or tertiary lenders.  Of course in the current climate, with many mainstream lenders shying away from property lending this may not apply.

The quality of the borrower
Clearly if the Queen wanted some money in a hurry, she would be in one of the hallowed City banking halls, rather than filling out a bridging loan application on-line.

The attenuated lending process
A Google search for “bridging loans” brings up 12 providers on page 1 of 332,000 results.  Of these, eight make a point of the speed of availability.  “Same day decision”, “loans within 48 (or even 24) hours”,“fast access with the minimum of formalities” are typical of claims made.  However thorough the interview and diligence process, there will be short cuts and lender, lawyer and valuer will all need to make assumptions that may not be capable of confirmation.  This means that the lending decision will be based on a series of judgments and inevitably some will be wrong.


What can go wrong

There are the obvious basic errors, which could form the basis of professional indemnity claims, but there are also areas that are not so clear such as a title with unclear entries which need to be investigated at the Land Registry or a valuer unable to gain access to the whole property – these should always be disclosed to the lending client who is usually the only one in a position to get an overall picture – in our experience it is very unusual for a lender to ask questions or seek further clarification.  This is without entering the realms of deliberate concealment and fraud, which we frequently come across in our property litigation work– bear in mind that the borrower is often at the end of the line before he looks for bridging finance.

Examples that we have found recently include
• Electrical installations that bypass the meter and use stolen equipment,
• Forged Assured Shorthold Tenancy agreements where the rents disclosed to the lender are 10% higher than those held by the tenants,
• A house divided up into 10 flats with no access to one flat which in fact was no more than a door with a number on it.
• A borrower who didn’t actually exist
• Forged identity documents
• Property subject to a single AST which is actually a House in Multiple Occupation which can have significant impact on planning and value
• Works carried out with neither planning nor Building regulations consent

Some of these would be hard to detect.  On the other hand there are often warning signs and one would hope that a valuer from a general practice background with daily exposure to agency and management problems would be alerted.  If there is a single trend that we notice in our litigation work, acting for both claimants and professional indemnity insurers, it is the preponderance of claims against firms or individuals who spend their entire time engaged in mortgage valuations, especially when they have a residential background.  Typical work at the moment relates to valuations carried out between 2004 – 2007.

Certainly when I am appointed as receiver it is not unusual for me to see valuation reports that are thin on detail (perhaps this is inevitable given the time constraints), which do not comply with RICS Valuation Standards (‘The Red Book’) or where queries are raised that have never been followed up, suggesting that the lender has simply read the valuation paragraph and then put the report away in a drawer as insurance against the day when things go awry.  As an example I once spent three days in the High Court before a lending manager admitted that he had not read the report, at which point the lender’s case against the valuer collapsed.

So when it does go wrong there is usually the need for prompt and decisive action at minimum cost.

We are still finding lenders who incur costs in issuing proceedings but why ramp up fees and interest, when a Fixed Charge Receiver under the Law of Property Act can be appointed in a day.  Of course, being a Fixed Charge receiver you might say that I had an interest, but there is no question that the process is quicker and cheaper.

 

 

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