These are not just words: quite apart from the negative impact on the borrower, foreclosure is also very costly to lenders and erodes equity. It pays to invest in an approach that measures, manages and mitigates risk for individual properties and across a portfolio if a borrower has multiple loans.
A borrower’s exit strategy will often be based on making improvements to a property, either to realise a significant appreciation in the resale value or to generate a healthy rental yield. This could be through a straightforward refurbishment to bring the property into better condition, converting a standalone property into an HMO, or a change of use from commercial to residential. These routes will all have very different timetables and costs attached to them, especially if planning permission is required.
Lenders will take a view through their underwriting process of how realistic the borrower’s plans are, but to manage their risk effectively, they need to manage the customer journey and gather ongoing intelligence during the course of the loan term. Is the borrower keeping up with the schedule of refurbishment works? Are there any foreseeable barriers to completion? Are the costs of the works within expected parameters? Is the market value of the finished property likely to realise the borrower’s expectations and enable them to repay in full at the end of the term?
That is where asset management comes in. What lenders need to know can often only be ascertained by having eyes and ears on the ground. Asset managers offer support to lenders through their experience and also coverage, enabling them to get a better understanding of how, for example, a refurbishment project is coming along, wherever in the country it is.
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An effective method of helping to manage risk is through the use of mid-term lending reports — six months into a 12-month loan, for example. This allows the borrower time to overcome any initial hurdles, but also leaves enough time for remedial action to be agreed and implemented if things are going astray.
We would look to set up an appointment with the borrower and have an open and frank discussion about where they are with their plans and how their exit strategy is shaping up. We will also provide the lender with a comprehensive overview of the property, condition, indicative value — now and at completion — and supply a detailed summary.
It doesn’t stop there, though. We will also have a good look round where the property is located, talk to local people to understand as much as possible about the area and what is happening locally, build up a clear picture of the risk attached, and report back to the lender with recommendations for them to consider.
The report gives the lender the information and overview as if they have been to the property themselves and by using their experience, they can agree a suitable approach to adopt with the borrower to mitigate any perceived risks.
Using a ‘traffic light’ or ‘RAG’ (red, amber, green) rating on each report, allows a lender to apply these results across their loan portfolio. This intelligence can aid risk-profiling from a borrower, loan-type or property-type perspective. This can then translate into valuable business intelligence to guide risk mitigation and inform the underwriting of future loans.
Effective asset management cannot eliminate risk — nothing can do that. But by giving lenders as much information as possible in a transparent format, we can help them understand and manage that risk.