You might wonder why a car loans provider across the Atlantic has anything to do with UK mortgages – on the face of it, very little.
But you’d be mistaken. There have been a number of major frauds in the US, leading to the collapse of several major companies.
The most high profile of these were sub-prime auto finance provider and used car retailer Tricolor and auto parts manufacturer First Brands.
Both companies were highly leveraged and both were lying to their funders. Among various complex fraud allegations were two practices common to both companies.
They were double pledging and providing loans backed by assets that did not exist.
They were double pledging and providing loans backed by assets that did not exist. Both companies had huge private credit funding lines from major global banks and private equity firms, many of which have lost billions of dollars as a result.
Tricolor issued asset-backed securities backed by pools of its sub-prime auto loans in June last year, with some of the tranches in that deal assigned AAA ratings by Kroll Bond Rating Agency, before going bust three months later.
GLOBAL FINANCIAL CRASH
The implications of this will not be lost on those who remember the 2007 – 2009 sub-prime crisis, credit crunch and subsequent global financial crash.
At the moment these cases are outliers but they have served to prompt global regulators to get ahead of any potential troubles further down the line.
Closer to home, the Bank of England is now engaged in a widespread review of the private credit market.
NECESSARY SAFEGUARDS
Asset managers, banks and private equity firms engaged in providing private credit lines to UK lenders of all types – mortgage, bridging, development, credit cards, car finance, asset finance, the list goes on – are proactively in talks with our regulators to ensure that safeguards are in place.
Many non-bank mortgage lenders are funded by private credit. Sometimes these deals are backed by retail banks, others receive funding from private credit funds or hedge funds.
While less common in the residential mortgage space, the majority of bridging and development finance lending in the UK is funded this way.
Funders often impose penalties on lenders for failing to deploy funds and the pressure to get money out of the door is immense.
There is no indication that the types of fraud seen in the US are happening in the UK.
There is no indication that the types of fraud seen in the US are happening in the UK but it would be remiss of anyone in this market not to give thought to how to protect themselves from such exploitation.
This is what we’re beginning to see. At Rockstead, we have tracked a steady rise in the number of funders interested in a more forensic view of their loan books in the UK.
REGULAR CASE CHECKS
Not all funders approach this in the same way. Some want more regular case checks, some are getting a lot stricter on underwriting, governance and the veracity of loan details. Some want independent oversight of loan origination.
While there’s no guarantee, over the coming year we may see many of the smaller bridgers fall out of the market, consolidate with larger providers and tighten up criteria and checks as a result.
Fundamentally, we see this as a good thing. It demonstrates further how bridging is becoming a more mature market, addressing a potential weakness before it becomes a worry.
