News & Views

Should brokers pick a lender based on proc. fee?

By Matthew Anderson, director of Fincorp

Throwing stones is always dangerous, particularly if you’re a lender and you’re throwing them at brokers. But I am going to throw this stone.

I have heard a worrying number of people suggest recently that there is a small minority of brokers out there who will reject using a bridging lender based on nothing more than proc. fee. It is true that most bridging finance is pretty standardised: you check the security, you check the term, you check the exit. The main things that differentiate bridging lenders are service, speed and cost.

Traditionally bridging rates were pretty standard across the market place at around 1.5% a month. The past couple of years have brought several new lenders into the space and it’s shaken things up: rates have come down on average and there is a lot more variety in the product types, structures and flexibility than there used to be. These developments are good for the customer for the most part. They can do more interesting developments, at a lower cost and drive up their profits.

Except, and this is why I am throwing the stone, it appears that the customer isn’t necessarily paying less for these “cheaper” loans. Instead, rates are coming down, fees are going up and the broker is taking a much larger slice of the pie. Now, don’t get me wrong, I am a huge champion of brokers. They are our lifeblood in bridging and there are many, many people in this market who do business with integrity, professionalism and, quite rightly, are driven by the often substantial financial rewards on offer.

I am a businessman myself – making money out of our commercial endeavours is the point. But I also believe that integrity and serving the customer well is fundamental. And I worry that there are a tiny minority of intermediaries who are maybe running the risk of forgetting that. I’m talking running a deal past several lenders that each come back with different rates, terms and costs to the borrower but one is dangling a whopping great 2% proc. fee in front of the broker’s nose.

Which do you pick?

It’s hard to turn down that kind of money, especially if there are only incremental differences in the rate and if the borrower doesn’t break the terms, well, then there’s hardly a difference at all. Except there is a big difference. This is personal bias at its very worst. As I understand it, there have even been instances where a broker has refused to do business with a lender because the proc. fee on offer was just not high enough.

This kind of mentality has a serious flaw, particularly in the world we operate in today. It is definitely not putting the customer at the heart of the transaction. It is not treating customers fairly. It is the opposite. And the fact is, like it or not, regulated or not, the Financial Conduct Authority has its beady eye on the whole darn lot of us in bridging. It has taken over supervising consumer credit and it is spending the next 18 months making very sure it’s got a tight grip on how unregulated lending in this sector affects and interacts with regulated consumer lending.

It is folly to think that, even where deals fall outside of the regulated world, choosing a lender based on the reward earned by the broker won’t result in the regulator coming down hard. It brings to mind another market that started to malfunction not so long ago. In 2006 and 2007 brokers were making hay, recommending prime borrowers take sub-prime loans because the rates were just as low, if not lower, all the while they were taking home twice as much bacon as the brokers recommending lower proc. fee prime deals.

It is naïve to think this kind of behaviour will be left unchecked. There is so much that the bridging market is getting right – let this not become the problem that undermines the professionalism we have built for our industry and competitive spirit that is so good for the customer.

Bridgers must treat clients fairly

By Matthew Anderson, director of Fincorp

I have always maintained that bridging is a whole different ball game from mainstream mortgages.

I stand by that, but the two markets are definitely linked. Recently, that relationship has become closer with consumer credit regulation moving to the Financial Conduct Authority earlier this year. 

The fact that the Mortgage Market Review rules were brought in to residential mortgages at almost exactly the same time is also no coincidence in my view. 

The FCA has said repeatedly, and for at least the past two years, that it is concerned about borrowers gaming buy-to-let to get around tighter income and affordability rules on mainstream residential deals.

Indeed, in the past month we’ve seen various lenders crack down on the criteria they will accept for first-time landlords – presumably in direct response to this risk.

While short-term finance is another ball game from both residential and buy-to-let mortgages, I think these developments are worth bearing in mind in the context of bridging. At the very least it should be a flag to short-term lenders to be extra vigilant against would-be first-time buyers trying their luck with a bridging loan with the aim of re-mortgaging either to a residential or buy-to-let deal.

Understanding the client’s exit has always been vital – it’s an oldie but a goodie, lending money is easy; it’s getting it back that’s the tricky bit.

But I would say that with the buy-to-let, residential and consumer credit markets coming ever closer together, having all your ducks in a row on the exit is fast becoming the most important thing a broker can do.

Bridgers are under the microscope in a post-MMR world. We know the second charge market is next on the list for scrutiny by the FCA. It’s vital we get out in front of any possible or attempted abuse of our market by borrowers desperate to get on the property ladder but locked out by the new MMR rules.

While it might seem unfair, this comes back to the FCA mandate to protect the consumer from over-exposing themselves to unwieldy and unsustainable amounts of debt.

For those in the bridging market, this consumer protection element has historically been less relevant – we’ve dealt with property professionals, developers, people taking on a commercial risk by investing in a property deal they believe they can turn a profit on.

We still deal with those people, but I sense that to be doing our jobs really well, it cannot hurt to consider the wellbeing of the customer when we underwrite deals.

That means being completely secure about the exit, and stress-testing the borrower and security’s ability to cover the debt should a sale take longer than expected – something that has been more noticeable in London in the past few months with buyers refusing to fuel a house price bubble and sellers being forced to be more realistic about their pricing.

The other thing it means is that it’s even more critical that lenders are clear and simple in the way they present the pricing of their deals.

It’s just not good enough to assume that professionals will be okay to accept exorbitant exit, extension or default fees. Part of being brought under the FCA’s regulatory regime has to be about rationalising short-term lenders’ approaches to pricing.

While Fincorp chooses not to charge any fees in a bid to be as straightforward on pricing as possible, I’m not suggesting that a good deal of choice in the market isn’t a good thing. On the contrary – it’s a sign of a healthy market working well for the customer.

But I believe that while in the mainstream residential market consumers have a choice between higher rate, no fee deals and lower rate, high fee deals, in bridging the sheer number of different fees and the inconsistent ways they are applied is not sustainable under the FCA.

Choice is a good thing. Surprising the customer with a nasty extension fee they weren’t expecting and then whacking on backdated interest and surplus charges should not be confused with choice though.

Ultimately different customers will choose deals priced in a way that suits them – for many that may involve rolling an arrangement fee into the loan while others will prefer a flat monthly cost

Keeping that flexibility in the market is important – but as the industry increasingly comes under pressure from the FCA to deliver good consumer outcomes and operate in a way that is fair and not misleading, I suspect and hope we will see some of the less upfront fees become a thing of the past.

Mirror Mirror: The rise of vanity bridging

By Matthew Anderson, director of Fincorp

Mirror, mirror on the wall, who is the cheapest of them all?

Sounds crass I know, but my Fincorp colleagues and I have recently been developing the idea that there are more and more lenders doing vanity loans in the bridging market. What do I mean by that? Well, the short-term nature of bridging means that in order to cover costs and make a decent enough return for investors, bridging lenders need to charge a certain amount.

At Fincorp we’ve been doing bridging loans for more than 25 years and in that time the calculations involved in working out what it costs to do a bridging loan have remained pretty much the same. Of course we want to make money, but ultimately, the rates we charge are the most competitive they can be.

Over the past four or five years, rates across the market have fallen according to various indices compiled by other lenders and trade bodies. But behind that headline decline in average bridging rates hide some uncomfortable truths in my view. Bridging costs are pretty fixed – all lenders would agree on that. The cost can vary based on cost of funding, but not by much. So how then can we have a market where bridging rates have fallen from as much as 2 per cent a month to as low as 0.7 per cent over the years when the base rate of interest has stayed static at 0.5 per cent?

The answer, simply put, is that margins are being squeezed.

But while cheaper loans are in the interests of borrowers, I suspect there are now lenders offering rates that not only can they not afford commercially, but that are actually losing them money.

These “vanity loans” have to be paid for somehow though, and it’s this that I fear could be a poisoned apple for the industry.

There are two obvious problems here: one, what a lender loses in rate he will make up for in fees; and two, if one loan loses money, another has to make double the margin to make up for it on the bottom line. Both problems come down to lenders finding ever more crafty ways to pile fees onto borrowers who end up paying the same or more for the loan by the time they’re finished as they would have had they simply taken a no-fees deal with a slightly higher rate.

There is also the potential that the need to make far larger returns on some loans to pay for loss-leaders elsewhere in the book drives some less scrupulous lenders to deliberately agree terms that are too short for borrowers’ needs, thereby ensuring a hefty whack of margin in the form of extension fees. This is bad enough for the borrower but for the industry there’s an even bigger problem I think. The rush to the bottom on bridging rates signals a market that is overcrowded and elbowing for market share. What we’re seeing is a land grab by lenders who are hoping they can weather a period of making losses on loans by forcing the more expensive competition out of the market at which point rates will start to go up again.

But cutting rates to the point that jeopardises the profitability of the business is a fool’s errand – and it’s one we’ve seen before: in 2007 sub-prime mortgage rates were in some cases lower than full prime rates. Lenders were so obsessed with market share they forgot to (or decided not to) price for risk. I need not remind anyone how that story ended.

Bridging is all about risk – all the more so because it is short term. And vanity has never done anyone any good at all. Not for nothing are we warned that pride comes before a fall. It is perhaps a lesson worth remembering.