According to a recent poll, 30% of respondents believed that bridging underwriters are issuing the incorrect loan terms for borrowers. Interestingly, some commentators have also said that there has been a rise in re-bridging, typically some being close to or having just passed their expiration date and are now accruing default interest. This means that lenders need to look into why the originally proposed exit routes were not achieved and, in reality, they may not be able to restore confidence in their underwriting, particularly in such a crowded and competitive marketplace.
This emphasises that when underwriting a bridging loan, the exit route must be achievable within the term. For instance, if the property is not to be refinanced or marketed for sale, and the provision of other funding is doubtful, then it is clear there is no exit route. For example, to build five houses and sell them all is unlikely to be achieved in a 12 month period, but selling one property that is already on the market is certainly more feasible. In other words, if a commercially viable exit route is not available, then 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 but, for bridging finance, the only checks that are 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 of 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 has the ability to look at each individual case on its own merits and is able to carefully assess the potential risks, rather than taking a ‘tick-box’ approach. They start by looking at the exit and, if it is not viable, in some cases they may be able to restructure the deal. Therefore, to ensure bridging underwriters are issuing the correct loan terms, they must delve into the borrowers’ background, and it is the responsibility of the intermediary to prepare the borrower for this.
With the correct underwriting, there is more security compared to an automated valuation and an assessment of the borrowers’ long term income stream. It is therefore important that both the borrower and the intermediary give the correct information from day one because receiving quality information from intermediaries is absolutely key to efficient underwriting.
In fact, a significant proportion of issues relating to underwriting can be easily resolved by lenders having reliable and sound processes in place while also effectively managing the customer journey from start to finish. In contrast, besides exposing lenders to other risk, poor underwriting can cause commercial damage by undermining its reputation with introducers as well as funding lines.
On a more positive note however, 44% of bridging underwriters are issuing the correct loan terms, brokers wrote 74.6% more bridging business in the past year and we are continuing to see innovation in the bridging market. It is clear that the sector has continued to evolve into a versatile and innovative form of alternative finance. Although not all re-bridging is bad, the industry must now continue evaluating the exit route for borrowers and its focus should be its commitment to responsible lending to ensure issuing incorrect loan terms becomes a thing of the past.