Wayne Smethurst: blog
Wednesday 4th July 2012
Distribution was king for both the specialist and securitising lenders through the late nineties and early noughties, indeed right up to the implosion of the sub-prime sector in 2007/08. Without fast and wide access to introducers, these lenders could not fill their targets and satisfy the demand for mortgage-backed securities. And it was packagers who gave them that fast and wide access.
Packagers were able to aggregate the portfolios of a panel of lenders and offer them out to a large number of introducers. At the same time, packagers provided outsourced front-end administration and servicing for their lender panel and so were able to control not just the lenders’ access to the market but also how the mortgage applications were presented to those lenders.
This ‘total distribution’ model took several years to mature, and with on-site lender underwriters keeping a close eye on things, most packagers played by the rules. The sector, though, was not without its stories of blind eyes and rule bending, and, yes, even fraudulent activities.
The bridging sector has always had specialist distributors. It’s a sector that’s been around for a long time – I’ve been involved myself with arranging short-term lending for over 20 years.
OK, the sector is very small scale compared with the overall size of the mortgage market, but there is an increasing appetite alongside an increasing demand. And that inevitably is focusing more attention on distribution and the packager model.
With all the knowledge and experience around of the ‘total distribution’ model for specialist lending, it’s only taken a few months for the same model to develop in the bridging sector.
But there’s an additional layer of complexity in the sourcing and processing of bridging loans, as some loans are regulated and some are not. A tick in the wrong place on the application form here and a little economy with the truth there and – hey presto – a loan that should be regulated suddenly isn’t.
This is fraud, and that’s bad news for the sector. The better-quality, professional bridging packagers will be tarnished by the brush of the few rotten apples, and some lenders will find they have some unenforceable loan contracts. Personally, I don’t want to see a repeat of the bad practices that surfaced during the height of the sub-prime boom.
It’s bad for the market. It’s bad for the lenders, especially those private lenders who don’t have the risk management knowledge and procedures the established lenders have. And most of all, it’s bad for borrowers, who’ll no doubt have to pick up the tab.
For most introducers, bridging loans only come along once in a while. It’s critical, then, to use a bridging packager which has a rigorous approach to sourcing and processing bridging loan applications. After all, introducers have to be able to show how they have found the most suitable deal for their clients, and that means following a compliant routine, whether the loans are regulated or not.
So let’s all protect our reputations, minimise any future financial risks and avoid déjà vu.
* Wayne Smethurst is partner at The Finance Centre
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