While the reasons given to the broker and borrower for the decline may not refer to margin, the late stage of refusal could suggest funder concerns over profitability.
“There’s a lot of competition for fewer deals. Lenders try not to come too far down the risk curve and at the same time to drop pricing because it’s counter-productive,” said Marcus Dussard, sales director of Castle Trust.
Castle Trust, which is hoping to secure its banking licence by early 2022, is currently funded using an investment bonds model. It has picked up specialist deals in some cases where lenders that had agreed in principle unexpectedly pulled back at the last minute.
“We’re finding that deals come to us when it’s already gone through the valuation and other hoops, and then it hits a layer where it it’s a ‘no’,” said Dussard.
“It seems to us that it’s so far down the line, that it’s more to do with funding issues than anything else,” he said.
One interpretation is that the market is so soft that pricing is sagging too low for some funders to tolerate in large volumes. Additionally, price wars among larger lenders in the mainstream market could be spilling over into specialist lending.
“We’ve seen some lenders withdraw from the market, which is sad for their staff, but it does appear to be a trend that could continue. We’re finding a distinct race to the bottom on price. As long as that continues and it’s constantly pushing against the profit line, then there is less room to be able to continue to do that,” Dussard said.
Classic greed versus fear trade-off
“We’ve seen more issues recently with lenders where funding lines in the background are dictating some of the credit policy. The lender has a product and is using funding lines from other institutions and sometimes the tail is wagging the dog. The funder in the background can have an impact on the credit policy of the lender at the front end,” said Robert Collins, co-founder finance brokers Sirius Finance (pictured).
“I’ve had a couple in the past year or so where terms were agreed, it’s gone to legals and then the lender’s gone to their funding line and for whatever reason they don’t rubber stamp it. The wholesale funder doesn’t give carte blanche to the lender and their input becomes an issue on some of the credits.
“The past year or two a lot of new lenders have come to market with a lot of different funding sources behind them. Sometimes the expectations of what the market is and what the returns are going to be – versus what the actual market is like with the competition that’s out there – are mismatched on what returns they are going to get for the credit profiles. The expectations can be two or three years behind, on what they thought they could charge and what sort of interest rates they could achieve. There is pressure on pricing. It’s the classic greed and fear trade-off, and a few times the fear is winning over,” Collins said.
A number of lenders have pulled out of the mainstream and specialist mortgages markets over the past year.
Tesco Bank closed to new business in June and has put its back book on the market. Specialist lender Magellan Home loans closed to new business in March, citing competition, low interest rates and rising credit risk.
Fleet Mortgages withdrew its range of buy-to-let mortgages in January after it reached the ceiling on its funding line and returned to the market in April, having secured a new line.
Octopus paused buy-to-let lending in November 2018, having “filled our allocated budget for residential and commercial term loan products well ahead of schedule”, after becoming “inundated with deals”.
Even so, Charles McDowell, managing director of specialist mortgages at Hampshire Trust Bank, interpreted the trend for late-hour refusals differently. He said that often when deal-making, “information comes to the fore, about the property or the borrower, that wasn’t known about before.”
He added that the challenge for lenders was more about “concentration risk” than about profitability levels.
“More likely it is that smaller, specialist lenders have a concentration risk level beyond which they don’t want to lend to a single customer. This could cap deals at a level of £15m, £20m or £25m.”
McDowell continued: “Even though the transaction is really solid, it’s a good property and borrower, the issue with concentration risk is that if something untoward happens, a random freak event, suddenly you can end up losing an awful lot of money. That’s why lenders mitigate by entering a syndicated deal.”
“It’s not about margins. Margins continue to be fairly healthy, as they are not under the same pressure that the smaller ticket, more vanilla transactions are,” he said.
“It’s an interesting market at the moment. It’s a challenging market but it shows that there are cracking developers out there, cracking borrowers out there with fantastic properties. Providing that lenders are able to step up to the plate in terms of being innovative and agile there is business to be won at good margins that work for everyone.”