CML share concerns about bridging

The Council of Mortgage Lenders has issued an article explaining its stance on bridging and whether an unregulated bridging market is 'a level playing field'.

Related topics:  Specialist Lending
Amy Loddington
5th September 2012
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The article reads as follows:

What are we to make of the bridging – or short-term secured lending – market? On the one hand, it appears to be bucking the trend and expanding, while other parts of the mortgage market remain stubbornly subdued. On the other hand, hard data is hard to come by, and it’s possible that there is more noise than action. Either way, all the current hype about bridging has got warning bells ringing in regulatory quarters.

We support a sustainable and well-run bridging market. At its best, bridging can act as a lubricant to the wheels of the housing market, enabling chains and transactions to complete when they would not otherwise do so, and speeding up completions. But we believe it is important to think about how bridging fits into the overall mortgage jigsaw, alongside mainstream lending and buy-to-let. The fact that regulators are concerned enough to have issued some stiff statements suggests that caution is needed. Here, we take a good look at the sector and consider how it may develop. Who offers bridging? Who uses it? How big is it, and why is it growing? How does it interact with other residential and buy-to-let lending?

Background

Traditionally, bridging finance was offered by banks as a short term form of finance to known customers, usually as a result of a mismatch on the timing of a sale and purchase of property. If the sale of the borrower’s existing property could not be completed in time to match the completion date of the borrower’s new property, a short term loan to "bridge" the gap could be offered, effectively allowing the borrower to service two mortgages at the same time, on the strict understanding that the bridging loan would cease, to be replaced by a normal mortgage, as soon as the borrower’s previous property was sold and the mortgage on it redeemed, usually on a particular pre-determined date.

In recent years, specialist bridging finance lenders have become more prevalent. In part, this reflects the fact that short-term lending now has a wider variety of uses, including appetite from small-scale property investors acquiring property for development/refurbishment purposes. A trade body now exists (the Association of Short Term Lenders), and its website lists 22 lenders, although this number is likely to be only a minority of the active lenders in the market. Other trade bodies representing the bridging market include the Association of Bridging Professionals, with a similar number of lender members as well as a number of broker members, and the National Association of Commercial Finance Brokers.

The size of the bridging sector is more difficult to gauge. Estimates from lenders operating within the bridging sector suggest annual gross lending in the region of £1 billion, although the CML has no specific data on this sector. However, soft indicators such as advertising and trade press coverage certainly suggest a growing market.

Bridging has a high level of visibility, with the intermediary trade press in particular regularly covering news and opinion from within the sector. A quick internet search reveals a large number of lenders and brokers offering bridging finance, both regulated and unregulated, and both first- and second-charge. Such lenders fund their lending in various ways, with some being entirely privately funded, while others use bank borrowing facilities or a mix of funding.

Who uses bridging finance?

Bridging lending – or, perhaps more accurately, short-term secured lending – now covers a variety of circumstances, including those where there is no specific pre-determined end-date. Bridging lending is still used for residential purposes where there is a mismatch between sale and purchase completion dates (for regulatory purposes, the FSA plans to regard regulated mortgage lending with a contract period of up to 12 months as bridging lending). However, there is now also an increasing market for bridging lending for property investors. And there is an increasingly fuzzy distinction between bridging lending and longer term lending, with  some short-term lenders offering longer-term products (sometimes up to 3 years) aimed specifically at developers or buy-to-let borrowers, including those buying at auction where speed of decision-making is valued, or those that for various reasons fall outside normal buy-to-let lenders’ lending criteria.
The normal distribution channel appears to be via brokers – there seem to be few examples of lenders offering bridging finance direct to consumers.

There is also an increased blurring between regulated and unregulated bridging lending, since it is the purpose of the loan that determines whether or not it falls within the scope of FSA regulation. Generally, bridging lending secured by a charge over owner-occupied property is regulated, whereas loans secured on non owner-occupied property (to a property investor, for example) is not. So the market is made up of a mixture of FSA-regulated lenders (which may sometimes also undertake unregulated bridging lending) alongside bridging lenders which undertake no FSA-regulated activity and do not require FSA authorisation or permission. From the consumer perspective, this may or may not matter, depending on how scrupulously and fairly the unregulated lenders and brokers in the sector operate. Sale and rent back, claims management, and lease options are all examples of unregulated (or previously unregulated) sectors where consumers were not universally well-served. However, the buy-to-let market is an example of an unregulated market where consumers appear well served. While regulation is not a panacea, it makes sense to think about how it could influence practices in the bridging market.

Is the regulatory environment effect
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