This week has been particularly challenging; at the eleventh hour, a bridging lender let us down on a multi-million pound bridging application.
We have been working with this lender for a long-time and they are usually very reliable but on this occasion, they did not perform, and the reasons given for declining are simply not good enough.
As all of you will know, mortgage intermediation is a results business. There is no point coming second place and clients rarely show any sympathy for your efforts if the eventual outcome is negative.
With this particular client, I had the benefit of completing a number of mortgages for him over the last three years so we had built up a good level of rapport and trust; he trusted me that I would deliver and this made me even more disappointed with the result.
I retrospectively analysed my involvement to see if I could have presented the case and information in a better way. I concluded that I was not at fault but it made me think that being more critical of cases where you are successful is equally as important as failure, albeit less intuitive, as a successful outcome typically indicates good performance, though this is not always the case.
This is probably a self-indulgent, cathartic exercise but I would like to share with you the background on this particular failure. Our client was seeking to raise 70 per cent LTV via a short-term mortgage to complete the purchase of four town houses in north-west London.
Valued at £5.2m on a 180-day basis, £6.2m open market value the loan was £3.64m including retained interest for term.
The structure was unusual in that our client was exchanging shares in his limited company, valued at £10m for 100 per cent share capital of an Isle of Man limited company that held the proposed security, plus £1m in cash. So £10m share value exchanged for £7.2m in shares and cash.
Our client needed to raise funds for cash-flow and required the increased liquidity of real estate compared with unquoted stock. The investor presumably favoured the potential upside of unquoted stock which is scheduled for IPO.
The lenders lawyer discussed the structure with the borrowers’ lawyer before we committed the client to any costs and on reporting back to the lender they agreed to proceed.
A valuation was promptly carried out and returned, the surveyor commented that the property could be suffering from structural issues and recommended a building report. I quickly organised this and the result was poorly laid flooring but nothing significant and certainly not a material structural defect. An annoying delay but not the fault of the lender.
Underwriting progressed at pace and I worked with the client to satisfy all requirements, one being an asset and liability statement. Having this information on file I provided this to the lender and included a commercial asset which is under the ownership of the clients’ offshore trust. This is where the problems started.
Having divulged the presence of an offshore trust the underwriter then requested full disclosure of income and assets held within. I immediately questioned this request as it had never been required with past lenders despite being disclosed, and frankly our client had substantial UK property assets held in personal name which could be relied upon via his personal guarantee should primary security prove insufficient.
Our client was not willing to disclose this information, his view, which I supported, was this bridging lender was charging him 10.2 per cent per annum secured by way of a first legal charge on security which they had confirmed was acceptable – a substantial personal guarantee and debenture. After various meetings internally the lender advised they required disclosure in order to validate AML. We again pushed back as his trust was not party to this transaction; no cash or property from the trust was being used to purchase and no proceeds would be due to the trust.
They again held various meetings and advised they needed disclosure to understand his source of wealth held within the trust. At this point I made a mistake, I wrongly assumed his wealth held offshore was derived from profits of his business in the UK, established over the last three decades. After seeking confirmation he actually derived this wealth from the sale of business in India over 25 years ago before he operated in UK. I can appreciate this change of information was unwelcome. I subsequently provided the borrower’s CV going back 40 years, including the business entities he had sold to generate his wealth held in trust.
Another round of internal lenders meetings resulted in the case being declined by compliance on the day completion was meant to be taking place. I was furious. Our client incurred nearly £20,000 in legal fees.
Consistency is key
I fully support prudent lending and we have experienced cases being declined in the past, but not in this fashion. The decision took far too long and largely emanated from a request that shouldn’t have been made in the first place.
Rather than protest further we sought an alternative knowing that this was a good case. We quickly arranged terms from three lenders, having provided them a complete file and our client agreed to proceed with one who we have worked with in the past. The loan completed six working days later and I picked up the legal bill.
Above everything else, bridging is based on trust, confidence and experience, we have to rely on our lenders to made reasonable decisions. On this occasion we do not believe the outcome was reasonable. In a very crowded market, intermediaries have a huge amount of choice and where differences in interest rates are incredibly small the key to success is consistent delivery.
The wider opinion of this provider within our business is still good but I will personally be giving them a wide-birth in future. Once bitten, twice shy.
Chris Fairfax is managing director of Positive Lending