If a commercially viable exit route is unavailable, it is not in the best interest of the client, the intermediary or the lender
In a worrying recent poll, 30 per cent of distributors said they believed bridging underwriters were issuing incorrect loan terms for borrowers.
This can mean there is not enough time to successfully exit the bridge and the borrower could be at risk of default.
Meanwhile, some commentators have warned of an increase in re-bridging – typically of loans being close to or just past their expiration date and now accruing default interest.
Lenders need to investigate why the originally proposed exit routes were not achieved. In reality, they may be unable to restore confidence in their underwriting, particularly in such a crowded and competitive marketplace.
Within the term
When underwriting a bridging loan, the exit route must be achievable within the term. For example, if the property is not to be refinanced or marketed for sale, and the provision of other funding is doubtful, it is clear there is no exit route. If a commercially viable exit route is unavailable, it is not in the best interest of the client, the intermediary or the lender.
There has also been a lot of noise around reducing and streamlining mortgage affordability stress tests. However, for bridging finance the only checks carried out are when the exit route is a refinance. The bridging underwriter must be satisfied that the borrower can obtain a remortgage at an adequate level to repay the bridge.
It is also important that all the options for interest are discussed and explained to the borrower, as well as the implications of each.
However, when it comes to non-regulated bridging loans where the exit is a refinance on a buy-to-let, the lender must check that the rental income is sufficient to allow a refinance on a buy to-let mortgage.
In my experience, a good bridging underwriter starts looking at the exit and, if it is not viable, may be able to restructure the deal in some cases.
To ensure that they issue the correct loan term, they must delve into the borrower’s background. It is the responsibility of the intermediary to prepare the borrower for this.
Done correctly, there is more security compared to an automated valuation and an assessment of the borrower’s long-term income stream. So it is vital both the borrower and the intermediary provide correct information from day one.
Poor underwriting, besides exposing lenders to other risks, can cause commercial damage by undermining the company’s reputation with introducers as well as funding lines.
That said, a significant number of problems relating to underwriting can be easily prevented if lenders have reliable processes in place and manage the customer journey effectively from start to finish.
Let us end on a positive note: brokers wrote 74.6 per cent more bridging business in the past year than in the year before and we are continuing to see innovation in the market.
Furthermore, 44 per cent of bridging underwriters are issuing correct loan terms. Clearly the sector has continued to evolve into a versatile and innovative form of alternative finance.
In addition, although not all re-bridging is bad, the industry must continue to evaluate exit routes for borrowers. Its focus should be its commitment to responsible lending in order to ensure that issuing incorrect loan terms becomes a thing of the past.
Kit Thompson is director of bridging loans at Brightstar