Do Bridge Loans still ExistAre there any bridging loans left?
Bridge too far? - The mortgage lender's council
How do we view the bridge or short-term secure credit markets? Whilst it seems to be going against the general direction and expansion, other parts of the subprime mortgages markets are still muted. One way or another, the whole buzz about the bridge has caused alarm chimes to ring in the regulation districts.
Our aim is to promote a bridge network that is viable and works well. In the best case, brushing can act as a lubricating agent for the real estate wheel, so that chain and transaction can be completed if they would not otherwise, and completion is accelerated. However, we believe that it is important to think about how to fit bridge building into the whole puzzle of mortgages, alongside straight loans and buy-to-let.
Here we take a look at the industry and consider how it could evolve. ¿Who provides bridge building? What is its interaction with other home and buy-to-lease loans? Historically, bridge financing has been provided by the banking industry as a short-term financing option for well-known clients, mostly as a consequence of an imbalance between the time of buying and selling real estate.
In the event that the sales of the borrower's current real estate could not be concluded in a timely manner to reach the date of the new real estate development of the borrowers, a short-term bridge facility could be provided to allow the borrowers to efficiently meet two simultaneous obligations under the condition that the bridge facility would expire and would be substituted by a regular facility once the borrower's prior ownership had been disposed of and the related liability was normally repaid on a pre-determined date.
Over the past few years, specialised bridge financiers have become more and more established. This partly mirrors the fact that short-term credit now has a greater diversity of uses, encompassing the appetites of small real estate buyers purchasing real estate for development/refurbishment use. There is now a trading organisation (the Association of Short- Term Lenders) whose website contains 22 creditors, although this figure is probably only a small proportion of those actively crediting on the open markets.
Further commercial associations that represent the bridge industry are the Association of Bridge Professionals with a similar number of creditor members as well as a number of brokers members and the National Association of Commercial Finance Brokers. It is more challenging to estimate the magnitude of the bridge area. Estimations by creditors active in the bridge loan industry point to an estimated 1 billion of total loans per year, although the CML has no detailed information on the area.
Nonetheless, weak indications such as advertisements and technical reports in the media point to a growth in the overall population. The company is highly visible, with the intermediate specialist media in particular reporting on industry gossip on a regular basis. Fast web research shows a large number of creditors and intermediaries providing interim financing, both regulatory and non-regulatory, both first and second placements.
Loan providers of this kind provide financing for their loans in a number of different ways, with some being fully private, while others use loans from banks or a mixture of financing. ¿Who uses the interim financing? Bypassing credit - or rather short-term collateralised credit - now spans a wide range of situations, some of which have no predetermined end date.
Bridge loans will continue to be used for housing where there is a discrepancy between sales and purchases (for regulator y reasons, the FSA intends to consider subsidised mortgages with a maturity of up to 12 month as bridge loans). In the meantime, however, there is also a growing demand for bridge loans for real estate investment.
There is also an increasing blurring of the line between bridge loans and longer-term credit, with some short-term providers of credit making longer-term offerings (sometimes up to 3 years) specifically to developer or buy-to-lease borrower buyers, some of whom buy at an auction that assesses the quickness of decision-making, and others who, for various purposes, are outside the credit limits of ordinary buy-to-lease providers.
Ordinary sales channels seem to be via brokerage - there seem to be few instances where creditors offer bridge financing directly to the consumer. A growing imprecision also exists between regulatory and non-regulatory bridge loans, as it is the object of the credit that decides whether it comes within the application of the TSA or not.
In general, the bridge over of loans backed by a fee on owner-occupied real estate is governed, while loans backed by non owner-occupied real estate (e.g. to a real estate investor) do not. Thus, the overall structure of the markets consists of a mix of FSA-regulated creditors (sometimes able to raise bridge loans on an irregular basis) and bridge creditors who do not engage in FSA-regulated activities and do not need approval or licensing from the Fed.
This may or may not be important from a customer point of view, according to how conscientiously and fairly non-regulated creditors and intermediaries work in the industry. Sales and rental back, claim handling and leasing opportunities are just a few instances of non-regulated (or previously non-regulated) industries where customers were not well supplied everywhere. The buy to leasebuy is an example of an non-regulated environment where customers appear to be well catered for.
Although regulatory intervention is not a cure-all, it makes good business sense to consider how it could affect bridge marketing practice. Speaking at our June luncheon each year, CML Chairman Martijn Van der Heijden proposed that the bridge deal could contain practice that conscientious creditors should not "turn a deaf eye" to.
"Whilst we should be defending our area against excessive regulation, we should also be supporting our endeavours to help pinpoint areas where there are temptations to bypass regulations and prevent bad credit from going through the net. Whilst there are no doubt some good creditors in it, the bridge and short-term credit markets at the present time are universal suitable for one purposes, for example?
The Commission has recently sent letters to all regulatory bridge creditors expressing concern about potentially non-compliant practice in the use of certain methodologies to calculate interest withheld. However, it is reasonable to say that the FSA's concern about the bridge financing markets goes further than just the interest provision issues.
The August regulatorial summary of the Financial Services Authority (FSA) sends a very focused statement to bridge builders entitled "Bridging Finance is NOT an alternative t o sales and rent back". 1. According to the Commission, its examination of the SRB and its ensuing follow-up with companies led to an efficient closing of this open and competitive area.
The Commission finds that this has a side-effect on the bridge segment and considers it necessary to give a sale warning: Recently, we have become acquainted with companies that market/promote bridge financing as an option to SRB. Let us remember to the companies that bridge financing cannot be bought and traded in this way, and we will take legal proceedings against any company that proves to be involved in this area.
" These raise clear issues as to whether the nonregulated bridge regime provides a competitive environment - there is an obligation for regulators (even when they write or arrange nonregulated business) to meet what the FSF expects, which is not the case for non-FSA regulators. In view of the relatively small and fragmentary character of parts of the bridge markets, this may mean that there is an even greater diversity of practices in the nonregulated than in the regulatory sectors in which the FISA is interested.
To some extent, the response is no, because there should be no initial provision of home loans - to persons who buy the real estate for life - outside the controlled context (and those who use the bridge for commercial ends do not need the same level of security as homeowners for whom the MCOB regulation framework is designed).
There is, however, a issue as to whether or not there are irregular loans outside the FSA's "perimeter", although they should actually take place within the FSA's "perimeter" - i.e. loans that are actually granted for housing but are not designated or handled as such. Therefore, the consumer should exercise utmost caution when considering using a bridge credit for housing but should in any way be given advice or encourage to explain a different intention at the claim phase.
It can be particularly important for homeowners in need, who can be provided with a bridge facility as a means of "credit repair". The FSA and the CML both consider debt repairs to be an inadequate use of interim financing. CML sees a valid justification for the bridge funding, both for its original purposes and in some other situations where the capacity to quickly close the deal plays an overriding role.
We, like the Feds, consider it important that those who sell bridge loans should have a responsibility to make sure that a straight forward mortgages does not better fit the needs of the borrowers, and that loans should only be granted if there is a trustworthy exiting policy for lower cost financing for the borrowers over a relatively brief period of time.
Several CML members are bridge-funding companies, and we would certainly not want to see a single place where there is no longer a valid bridge-financing system. Yet the scale of the recent boom in this sector - along with regulatory concerns and the relatively limited availability of robust sector information - raises issues about the perceived value of today's commercial practice.
Recognising that the reputations of good bridge financiers and other mortgages providers have the inherent ability to be affected by the actions of less conscientious financiers and agents in this area, we endorse a powerful line of Scope Surveillance (FSA) to make sure that transactions that should be subject to regulation are not described as overregulated.
Not only do we endorse the endeavours of creditors to achieve greater openness and higher credit quality but we also welcome enhanced and early regulation to make sure that credit in this sector is sound, healthy and fair.