Lack of funding from traditional channels due to the credit crunch means that traditional lenders won’t currently use brokers. Most lenders are struggling to look after their own direct business. The current shake-out of the broker market will end in the medium term, and with fewer brokers the good times will return. When this happens, the biggest gains will be made by those who have invested wisely in technology, specialised in niche services, or preferably both. In addition, although the internet has transformed the broker market, there is no immediate prospect of all business becoming electronic. So there will still be some opportunities for conventional brokers, particularly in niche markets. In the UK, bridging lenders are currently filling the gaps of traditional lenders, but they must still set their criteria to match those of the exit lender. So if the exit lender loan-to-value ratio is 65%, then the bridging lender has to bear this in mind when assessing the deal.

Fraud – most bridging lenders do not have a bottomless pit, but just because bridging loans are a short-term proposition does not mean the risks are in any way reduced. If fraudsters or a few unscrupulous brokers or clients pass on unclean business that has no way of being redeemed, then a pot of £10,000,000 could be lost in just 20 loans. Bridging lenders are also obliged to repay their investors who will simply pull the plug if they do not get their money back. The European crisis didn’t happen overnight – it was the domino effect of investors losing confidence in one market after another, exposing a complex web of risks. I have personally seen a few banks with good business models and good profits go out of business because their funding arms were withdrawn due to risks that were perceived as much as real. The herd mentality of investors means it’s more important than ever to eliminate risk from your business, and while none of us can control the Euro crisis, fraud can be virtually eradicated. The best lenders have already or are putting in measures to virtually wipe out 99.99999% of fraud. With more bridging lenders entering the market, thus leading to diminishing returns, a fraud rate of just one or two percent can stop funding. Technology can help, but having the best people and best procedures can virtually eradicate fraud. Some lenders let themselves down by not having all of these in place.

Regulation – Most regulation helps consumer confidence, which is good for the market, but occasionally regulators over react. For example, the Dodd Frank Act in America is stopping many new businesses from being created and can sometimes cripple financial markets that they are trying to protect. Recently the FSA has suggested that deducting the interest up front is bad for the client. I can see why they are arguing this – it seems to be response to a few irresponsible bridging lenders who have given the rest of the sector a bad name. To me however deducting the money up front helps all parties:

• Bridging lenders get their interest paid, which means investors get paid.
• The client shows that they can afford this mortgage.
• The exit process is easier because the client has paid all of their interest.

On exiting a bridging loan the client is, in my opinion, better because they can get a loan at a rate of 3 to 6% instead of 15 to 30%, thus avoiding the risk of losing everything they have worked hard for.

I would ask the FSA is to please look at this – it will help everyone by stabilising the market, thus keeping the funds flowing and making more money available to lend out to more clients. Not deducting the interest up front however will prolong the agony of bad debt which denies loans to the client and ties up funds in the market which needs affordable short-term finance at minimal risk. This is what bridging loans were created for – without them, the market would be plagued by bad debt, leading to losses for everyone and less to lend. Rates of 3-6% as opposed to 15-30% equate to a difference between paying £30,000 pa on a £1,000,000 loan instead of £300,000 pa. Customer will be treated more fairly, more clients will be able to exit, there should be less bad debt for the lenders and investors and ultimately more money to lend – something I’m sure the FSA would agree is good for everyone.