One of the advantages of having a few grey hairs is having the experience to know how to read signals.
In the short-term finance market this is particularly useful.
Lending money is easy; it’s getting it back that’s the hard bit.
Over the past three years bridging has really exploded – we’ve gone from a market under a billion pounds of gross lending a year to, some estimate, closer to £2bn.
Doubling the size of the market in three or four years under any circumstance is impressive. But in an economy that has been only very slowly returning to recovery mode, it should be ringing some alarm bells.
Let me recap. Short-term finance, in all its many and flexible formats, comes back to one basic principle, money at a price for a short period, secured on property.
Bridging is not a long-term solution – it’s a quick and flexible fix suitable for professional property players who understand the commercials.
The reason it’s seen an explosion in popularity is two fold. The high street banks stopped lending on anything other than vanilla deals in the residential, commercial and buy-to-let markets leaving a gap for bridgers to fill. And with interest rates static at 0.5% since March 2009, investors have been hunting for yield.
Bridging fulfils both sides of the equation. Without it, small-scale residential developments, auction purchases and refurbishment projects would have been left undone. Investors have also reaped good returns, in the region of 10% to 15% annually – a far cry from high yielding bond rates around 6%. And they have the security of an asset underlying the transaction.
But those grey hairs and years of experience lending in this market are telling me to think twice about the success of bridging.
At the same time as we have seen the market more than double, we’ve seen a number of new players enter the market – from mainstream residential mortgage lending backgrounds, mortgage broking backgrounds and several from packager backgrounds.
A diverse market place is a good thing for everyone – it encourages competition, drives up standards and drives down pricing for borrowers. These things are welcome. Less welcome is the mad dash for market share.
This, I worry, is having the opposite effect.
Rather than driving up standards, it could be encouraging laxer underwriting by some less experienced lenders.
It also seems to be encouraging some lenders to come up with ever-more clever ways of selling their wares.
It was ever thus that brokers and borrowers alike are seduced by low headline rates and don’t seem to fully appreciate how large fees can contribute to the overall cost of a loan.
The market is seeing rates come down month after month but fees are edging up.
Three years ago lenders charging an arrangement fee charged 1%, used to pay the broker in the transaction. Recently I’ve noticed up front fees around 2%, and sometimes more.
Where is the customer in all of this?
Being an old boy on the block may, as some levy against us, mean we stick to our guns on criteria, the deals we’ll consider doing and on our insistence that we won’t charge fees.
It means our rates appear higher than others out there in the market, but that’s because we don’t charge fees. The cost to the borrower is often the same or better.
But being an old boy also means, frankly, we’ve been around the block several times.
Fincorp has weathered three severe property recessions. We’ve been lending short-term money to property professionals for more than 25 years.
I know a market running away with itself when I see one.
People are piling into bridging because they see a quick buck. But the problem with quick bucks is that they are rarely sustainable.
Experience matters but I fear that our market, which has several professional and experienced lenders in it, has become riddled with people just out for themselves.
There is increasingly too much money going to too many people in the chain.
Being an old boy on the bridging block means I care that an overcrowded market competing too savagely for business, that frankly shouldn’t be done, doesn’t bring the block crashing down around our ears.
Bridging offers value to customers and value to the health of the property market more generally.
We must be careful not to wring it within an inch of its life.