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Start preparing for the next crash, bridging will not be immune – Benson Hersch

by: Benson Hersch, CEO of the ASTL
  • 11/09/2018
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Start preparing for the next crash, bridging will not be immune – Benson Hersch
It’s 11 years since the unthinkable happened in the UK banking sector. September 2007 saw a run on Northern Rock with queues forming outside the branches of the former building society.

 

People wanted their money – but the bank was running out of cash, as well as sources of funding.

The subsequent collapse of Northern Rock was the first signal to the British public that the credit crunch had arrived in the UK.

People panicked. Consumers stopped spending. High street shops started closing down.

High street funding rapidly dried up as mainstream lenders tightened up their lending criteria.

This presented an opportunity for specialist lenders to establish themselves and grab an increased market share.

Some high-profile bridging lenders who thought the good times would roll forever were caught out.

 

Standards improved

As property prices started falling and housing market activity slowed to a crawl; the impact of so-called “liar loans” and irresponsible lending practises started to show.

In this challenging environment, bridging lenders felt the need for a platform where they could learn from each other and improve the professionalism of the sector.

In March 2008, the Association of Short Term Lenders (ASTL) was established, initially with 17 lenders.

The ASTL sets high standards which members need to meet.

It also helped HM Treasury, the Financial Conduct Authority and the Financial Ombudsman Service understand the short-term lending sector better.

Membership of the ASTL has since grown to 35 members and 28 associate members.

 

Another crash?

But the big question for ASTL members is: should we be preparing for another crash?

These are undoubtedly uncertain times.

The Royal Institute of Chartered Surveyors (RICS) says tax and stamp duty reforms have impeded the growth of the private rented sector. Meanwhile the housing market as a whole is slowing and properties are taking longer to sell.

Should we be worried?

I think we could see an economic downturn in the short-term.

This will mean that, as in 2008, there will be opportunities for the bridging sector, but also dangers we need to be aware of.

There will inevitably be casualties and lenders need to embrace technology to meet the demands of a changing world.

But I’m certainly not predicting a short-term lending crash.

I expect a stock market correction (there are already signs of this) and this will create an atmosphere of higher caution from the mainstream banking sector, which in turn could well affect property prices.

 

Bridging not immune

There are already issues with both quality and price of new build properties where customers have used Help to Buy to obtain these at high loan-to-value (LTVs).

Other worrying issues are the very high level of consumer debt (particularly unsecured debt) and national debt, as well as the continued weakness of Sterling.

Each downturn may carry some similarities to previous ones, but will also include some unique characteristics which were not expected.

Bridging lending will not be immune and it’s up to individual firms to take cognisance of the economic environment and review their strategies accordingly.

Irresponsible lending practices include very high LTVs, insufficient property knowledge and a race to the bottom on rates, rather than basing rates on risk.

 

Small increases, big impact

We are currently in a low-interest environment and even small increases can have major effects on borrowers.

For example, if an individual is paying 2% per year on a loan, an increase to 2.5% would mean an absolute increase in the amount of interest payable of 25%.

This will constrain a return to “normal” rates over the next few years.

Hopefully, the UK economy will muddle through as usual, but the waters are choppy.

What I do think is that the short-term mortgage market is here to stay.

 

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