Bridging: How cloudy is the exit?

Bridging: How cloudy is the exit?



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This time last year, various single-currency heads of states came together with the Eurozone and the IMF to formulate a bailout plan for Greece.

Collectively, they were able to offer Greece a bridging loan, which helped it climb out of its immediate perils.

One year later though, neither Greece nor the nations who backed the loan have been 'saved', as Greece is simply unable to repay the monies.

In the UK bridging market, which has grown substantially over the last 18 months, lenders are becoming increasing aware of the importance of a clear and secure exit strategy, so that they may protect both the borrower and themselves.

Simon Ismail, of Goldentree Financial Services, said: “Unless lenders in our industry have suddenly decided to become pawn brokers, then all will agree that the exit strategy is fundamental to any loan application!”

However, the nature of the exit strategy must surely change with the times. Pre-recession, a high valuation on the property was often sufficient to give lenders peace of mind, as the two underlying assumptions were that: prices always rise; the home will sell for roughly the price at which it was valued.

James Bloom, CEO of Regentsmead, said: “The sale exit route is increasingly difficult as the market is fairly stagnant at present. We have found an increase in the time it is taking to sell completed properties. Our loan book is increasing because we are taking on new business but also because we are not being repaid on due redemption dates.”

And whilst the classic 'sale' exit route is risky, other exits present problems of their own.

Simon Ismail explained: “If the exit is by way of sale of asset then the diligence required is pretty straight forward (although never guaranteed) – if the exit is refinance then this is a lot more complex.

“Whilst a buy-to-let refinance is fairly easy to assess (rental cover, LTV, credit history) commercial refinance can be a lot more challenging. Many factors come into play and differ depending on the type of commercial property to be refinanced. Company accounts, forecasts, yields, tenant covenants, terms of lease, etc. no matter how much diligence a lender does to check that a proposal stacks up in terms of suitability for a bank to refinance – the uncertainty of property backed lending remains, and although it is getting better, some decisions never cease to amaze.”

It is somewhat impossible to estimate how many borrowers have spent the funds received from a short term loan yet have not been able to sell their property or refinance. This is because in many cases it is to the lender's benefit to extend the repayment terms rather than be burdened with the asset.

James Bloom said: “I am sure most short term lenders have a number of loans on their books where the exit strategy (if there was one!) has not materialised.” 

It seems then that the stagnant housing market, which arguably strengthened the UK bridging market, also made a clear exit more important than ever.

Simon Ismail noted that his team no longer rely on valuations, but actually travel, across the country to visit each and every property before they lend. James Bloom also noted the extra ‘caution’ that his team makes before approving applications.

Gareth Lewis, Head of Business Development at Tiuta, explained the importance of the introducer in the process.

“To ensure the effectiveness of an exit strategy, communication with the introducers generating the business is absolutely vital, as is an overall understanding not just of the bridging loan market but also the mainstream mortgage market,” he said.

“Certainly we would anticipate what might be the ‘worst case scenarios’ for potential borrowers in terms repaying their bridging loan – are they able to sell the property; if they are struggling to sell do they have scope to reduce the price; could they move to a buy-to-let option?  These are all questions we would ask to ensure we are completely happy about the exit for a particular loan.”

Gareth Lewis concluded that ‘any lender worth their salt’ would have strong processes in place to ensure that the exit was in place, and furthermore, that there was a back-up. What we must try to establish then, is the number of lenders who are not ‘worth their salt’, and who continue to lend to borrowers who are set to suffer the same woes as Greece in their efforts to repay funds.

By Katie-Jill Rowland

 

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