A bridge too far?
What are we to make of the bridging – or short-term secured lending – market? On the one hand, it appears to be bucking the trend and expanding, while other parts of the mortgage market remain stubbornly subdued. On the other hand, hard data is hard to come by, and it’s possible that there is more noise than action. Either way, all the current hype about bridging has got warning bells ringing in regulatory quarters.
We support a sustainable and well-run bridging market. At its best, bridging can act as a lubricant to the wheels of the housing market, enabling chains and transactions to complete when they would not otherwise do so, and speeding up completions. But we believe it is important to think about how bridging fits into the overall mortgage jigsaw, alongside mainstream lending and buy-to-let. The fact that regulators are concerned enough to have issued some stiff statements suggests that caution is needed. Here, we take a good look at the sector and consider how it may develop. Who offers bridging? Who uses it? How big is it, and why is it growing? How does it interact with other residential and buy-to-let lending?
Background
Traditionally, bridging finance was offered by banks as a short term form of finance to known customers, usually as a result of a mismatch on the timing of a sale and purchase of property. If the sale of the borrower’s existing property could not be completed in time to match the completion date of the borrower’s new property, a short term loan to "bridge" the gap could be offered, effectively allowing the borrower to service two mortgages at the same time, on the strict understanding that the bridging loan would cease, to be replaced by a normal mortgage, as soon as the borrower’s previous property was sold and the mortgage on it redeemed, usually on a particular pre-determined date.
In recent years, specialist bridging finance lenders have become more prevalent. In part, this reflects the fact that short-term lending now has a wider variety of uses, including appetite from small-scale property investors acquiring property for development/refurbishment purposes. A trade body now exists (the Association of Short Term Lenders), and its website lists 22 lenders, although this number is likely to be only a minority of the active lenders in the market. Other trade bodies representing the bridging market include the Association of Bridging Professionals, with a similar number of lender members as well as a number of broker members, and the National Association of Commercial Finance Brokers.
The size of the bridging sector is more difficult to gauge. Estimates from lenders operating within the bridging sector suggest annual gross lending in the region of £1 billion, although the CML has no specific data on this sector. However, soft indicators such as advertising and trade press coverage certainly suggest a growing market.
Bridging has a high level of visibility, with the intermediary trade press in particular regularly covering news and opinion from within the sector. A quick internet search reveals a large number of lenders and brokers offering bridging finance, both regulated and unregulated, and both first- and second-charge. Such lenders fund their lending in various ways, with some being entirely privately funded, while others use bank borrowing facilities or a mix of funding.
Who uses bridging finance?
Bridging lending – or, perhaps more accurately, short-term secured lending – now covers a variety of circumstances, including those where there is no specific pre-determined end-date. Bridging lending is still used for residential purposes where there is a mismatch between sale and purchase completion dates (for regulatory purposes, the FSA plans to regard regulated mortgage lending with a contract period of up to 12 months as bridging lending). However, there is now also an increasing market for bridging lending for property investors. And there is an increasingly fuzzy distinction between bridging lending and longer term lending, with some short-term lenders offering longer-term products (sometimes up to 3 years) aimed specifically at developers or buy-to-let borrowers, including those buying at auction where speed of decision-making is valued, or those that for various reasons fall outside normal buy-to-let lenders’ lending criteria.
The normal distribution channel appears to be via brokers – there seem to be few examples of lenders offering bridging finance direct to consumers.
There is also an increased blurring between regulated and unregulated bridging lending, since it is the purpose of the loan that determines whether or not it falls within the scope of FSA regulation. Generally, bridging lending secured by a charge over owner-occupied property is regulated, whereas loans secured on non owner-occupied property (to a property investor, for example) is not. So the market is made up of a mixture of FSA-regulated lenders (which may sometimes also undertake unregulated bridging lending) alongside bridging lenders which undertake no FSA-regulated activity and do not require FSA authorisation or permission. From the consumer perspective, this may or may not matter, depending on how scrupulously and fairly the unregulated lenders and brokers in the sector operate. Sale and rent back, claims management, and lease options are all examples of unregulated (or previously unregulated) sectors where consumers were not universally well-served. However, the buy-to-let market is an example of an unregulated market where consumers appear well served. While regulation is not a panacea, it makes sense to think about how it could influence practices in the bridging market.
Is the regulatory environment effective?
In his speech at our annual lunch in June, CML Chairman Martijn Van der Heijden suggested that the bridging market may contain practices to which scrupulous lenders should not "turn a blind eye". He observed: "While we should defend our turf against regulatory excess, we should equally support efforts to identify areas where there are attempts to circumvent rules and allow poor lending to slip through the net. While there are undoubtedly some good lenders in it, is the bridging and short-term lending market at the moment universally fit for purpose? For example would it benefit from regulatory scrutiny and would it really damage us to say so?"
The FSA clearly shares those concerns. It has recently written to all regulated bridging lenders, outlining its concerns about potentially non-compliant practices relating to the use of certain retained interest calculation methods.
It is fair to say that the FSA’s concerns about the bridging finance market extend more widely than simply the retained interest calculations points, however. In its August regulatory round up, the FSA targets a very specific message to mortgage brokers on the bridging sector, headed "Bridging finance is NOT an alternative to sale and rent back". The FSA observes that its review of regulated sale and rent back (SRB), and subsequent follow-up action with firms, has resulted in the effective closure of this market at present. It notes a side effect of this on the bridging market, and feels it necessary to issue a sales warning:
"This means however that some firms are looking at other ways to generate SRB opportunities. SRB is typically a last resort for borrowers who are in financial difficulty but need to stay in their home. We have recently become aware of firms that have been marketing/promoting bridging finance as an alternative to SRB. This is aimed at encouraging these vulnerable consumers to refinance their way out of difficulty. There is a very high risk consumers could end up in an even worse financial position. We would like to remind firms that bridging finance must not be sold and marketed in this way and we will take action against any firms found to be active in this area."
This raises obvious questions about whether the unregulated bridging market offers a level playing field – there is an onus on regulated firms (even when writing or arranging unregulated business) to conform to FSA expectations, which does not exist among non-FSA-regulated firms. Given the relatively small-scale and fragmented nature of parts of the bridging market, this may mean that an even wider variety of practice exists in the unregulated sector than in the regulated sector in which the FSA is taking an interest. Does this matter? In some ways, the answer is no, in that there should be no first-charge residential lending – to people buying the property to live in – happening outside the regulated environment (and those using bridging for business purposes do not need the same protection as home-owners, for whom the MCOB regulatory environment is designed). However, one question is whether or not there is unregulated lending happening outside the FSA "perimeter" when it should in fact be inside – that is, lending which is in fact for residential purposes, but is not being declared or treated as such.
We do not know the answer to this question. However, given the FSA’s stringent requirements and the costs and burdens of compliance, it seems a realistic risk. Consumers should therefore take extreme care if they are planning to use a bridging loan for residential purposes, but are in any way advised or encouraged to declare a different purpose at application stage. Not only is this fraudulent, but it also potentially reduces the protections that would apply to them if they were borrowing for home-ownership purposes. They also need to consider the long-term financial consequences of retained interest, which is likely to prove significantly more expensive overall than paying interest monthly. This may be particularly important for home-owners in financial distress, who may be offered a bridging loan as a form of "credit repair". Both the FSA and the CML regard credit repair as an inappropriate use of bridging finance.
The future of the sector
The CML sees a legitimate rationale for bridging finance, both for its traditional purpose, and in some other circumstances where the ability to complete the loan speedily is an over-riding consideration. Like the FSA, we think it is important that those selling bridging loans should have a duty to ensure that a mainstream mortgage would not suit the borrower’s needs better, and that loans should only be made where there is a credible exit strategy to cheaper finance for the borrower over a reasonably short timeframe.
Some CML members undertake bridging finance, and we would certainly not want to see a market where legitimate bridging finance was regulated out of existence. However, the current levels of hype about this market – as well as the regulator’s concern, and the relative lack of reliable industry data - raise questions about the quality of current business practices. Given that the reputation of good bridging lenders, as well as other mortgage lenders, has the potential to be affected by the activities of less scrupulous lenders and brokers operating in this niche area, we support a strong FSA line on "policing the perimeter" to ensure that business which should be regulated is not being written as unregulated. We support the efforts of those lenders who are making efforts to increase transparency and raise standards, and we welcome increased regulatory scrutiny on a timely basis to ensure that legitimate lending in this market is sustainable and built on solid foundations.
