On the upside, there is no liquidity shortage as was the case with the 2008 financial crisis, while the stamp duty holiday has given the housing market a new lease of life.
There is also a pending Budget which should bring further government stimulus.
Lenders have a position of responsibility and must be sensible in their approach to borrowers who find themselves in default.
They must discuss with the borrower how they can work together and try to find a solution that works for both sides.
It may be that there is no option but to sell the property with the lender wanting to re-coup a certain level of the sale price – anything above that and the borrower can keep it.
But lenders could lose money where they have been too generous when it comes to loan-to-values, especially on the development side.
Aggressive GDV lending
Some lenders (and valuers) have gone in quite aggressively on perceived valuations or gross development value, predicting what the development will be worth at completion which could be a couple of years away.
But these are decided based on constant market conditions with no potential upheaval or disruption.
If Covid-19 has taught us anything, it is that there are many unforeseen events and variables and these could easily throw a small development off course.
If lenders don’t make allowances for such possibilities, they could lose money.
For example, the cost of materials or labour could rise – EU workers may no longer want to or be able to come to the UK because of Brexit, forcing the developer to hire British labourers who tend to be more expensive.
The weather may be particularly bad so the project is delayed, or the development may simply not turn out to be done to the same standard as previous developments.
Loan to value (LTV) is such a critical part of lending. If lenders are too bullish, whatever the rate, and even if the borrower believes they have an exit strategy, they may not be able to get out.
Assessing the exit
If lenders haven’t looked at the applicant’s exit closely, whether that be a refinance or sale, the borrower may find when they come to exit that they are not strong enough to get funding from a bank or have to price their property too high in order to redeem.
When they come to refinance, they may struggle to meet LTV and affordability criteria.
GDV lending is risky because of the unpredictable nature of life, unless the lender is really covering itself through other security or is very much involved in this type of lending day in, day out.
In our space, many lenders who have lent on this approach may find themselves crystallising their losses in a year’s time.
Brokers are now more likely to approach lenders they know, that have been around for many years, and are sensible.
Nobody wants to go down the riskier side – the deals brokers get for their clients are safer, with an ability to refinance.
A broker wants to know that their client will be able to refinance in a year or two rather than finding themselves in a position where the property is repossessed.
There is pain to come with such distressed levels in some cases that lenders may not get their full redemption.
But while repossession is sometimes inevitable, the delay in evictions may allow lenders and borrowers to work together towards a more satisfactory solution, which may mean some lenders taking less on the redemption in order to assist the borrower.