Sick of settlement letdowns?

Avoid settlement letdownsA common criticism of private lenders is the regular occurrence of settlement default, where the lender is unable to come up with funds promised. This can happen when the lender doesn’t have a steady flow of cash coming in and is unable to raise the funds necessary to finance the mortgage for the agreed amount.

Usually a private lender will need to raise funds from investors in order to fund the loan. If the lender does not have a steady flow of investor funds coming in or a pool of funding readily available there could be issues when it comes to time to settle. Unfortunately this happens far too often and can leave the borrower high and dry and the project they are borrowing funds for can fall over. Not to mention the time and money wasted on the loan application process.

How to avoid settlement default

If you want to avoid the letdown of settlement default then here’s a few things you can do:

  • Don’t fall for quick settlement claims. Many private lenders will state that they have super fast settlement times, sometimes as little as 24 hours. Usually this is completely unrealistic and used as a marketing ploy. If it sounds to be good to be true…well, you know the rest.
  • Ask about the lenders settlement record. Find out how often loans they have worked on make it to settlement stage. Take a look at case studies and check out testimonials received from respectable brokers or borrowers.
  • Ask where the funding come from. This is a very interesting concept that very few people consider, where does a private lender actually get their money from? Its a good idea to ask who the Lender of Record is? Some lenders will change this on the ultimate loan documentation when a private lender is brokering the transaction to the person writing the cheque. Private Mortgages Australia uses the one vehicle for all its loans. A lot of private lenders use a sophisticated investor networks to underwrite their loan advances. Other private lenders raise funds from wholesale or retail sources with the use of an Australian Financial Services License (‘AFSL’). PMA has received backing from an  independent wholesale funder that has committed to investing up to $100 million to fund our portfolio of registered first mortgage loans.
  • Find out who makes the lending decision? In some cases it is the individual investor that makes the final decision to lend the funds required and will essentially “write the cheque”. This isn’t an ideal situation. Imagine that you are a borrower and you submit a loan to a private lender. Everything seems to be going well, you pay the upfront fees, order the loan documents from the solicitor, but then are taken by complete surprise when your loan application is rejected despite being formally approved. What has occurred is that the loan was approved by the ‘middle man’ but then turned down by the person writing the cheque. Unfortunately this occurs all the time. The smarter alternative is to make sure that the private lender is the one who is making the decisions. This is a safer and more effective situation for the borrower. PMA operates a number of Funds and our Credit Committee makes the lending decision on behalf of the pooled mortgage fund.

If you haven’t already, align yourself with a good private mortgage provider that has a proven track record with finalising settlements which can only be a good thing for you and your clients.

 

Q&A with Peter Cuskelly – National Credit Manager

Private Mortgages Australia National Credit Manager Peter Cuskelly.Peter Cuskelly is the National Credit Manager at Private Mortgages Australia. He joined in 2015 bringing with him his wealth of experience in credit across all types of lending including commercial, agribusiness, mortgage and personal clients.  We thought we’d take the opportunity to find out from Peter himself what’s involved in his role and what he’s looking for in a commercial finance application.

1. What made you decide to join PMA?

After a long career as a bank lender and a short time as a broker, I was attracted by the flexibility of PMA to do a deal that makes sense, rather than making the borrower/broker meet the rules and restrictions of bank lending policy. I also like PMA’s transparent approach making sure the broker and client stay informed along the whole process with no nasty surprises.

2. What’s some of the more common reasons why borrowers can’t get traditional bank finance and need a private mortgage?

Common reasons include poor credit record, inability to demonstrate servicing and speed to funding.

3. You charge higher rates of interest than traditional bank lenders. Why is the market prepared to pay private mortgage rates?

We provide a niche service to provide loans where the loan structure gives the borrower what they need and has a sound exit, but just doesn’t meet the strict criteria of the bank. Often our customers are entering deals that are very profitable, so they don’t mind paying a bit extra for the ability to get the deal over the line quickly.

4. Tell us about the type of credit PMA provides?

PMA lend for any legitimate business purpose. Our core business is short term funding from two to 12 months up to $2 million, however we are now also managing larger loans from $2 million to $50 million with our wholesale funding pool which has really opened up some great opportunities.

5. Do you have postcode restrictions?

No – PMA will lend against property anywhere in Australia however we do reduce the Loan / Value Ratio (LVR) based on the property type and use the Genworth Security Location postcodes.

6. What’s the maximum LVR you will go to?

Our maximum LVR is 75%.

7. What evidence of serviceability do you require from a borrower?

This is the key differentiator for PMA – we capitalise interest over an agreed prepaid term so the client doesn’t need to make regular payments during that period. Repayment is based on the borrowers’ ability to execute their “Exit Strategy” to repay the loan, rather than service the debt over a long term.

8. Tell me more about what you look for in an exit strategy?

The key things that I look for in an exit strategy are that it is realistic and can be achieved in the timeframe. For instance, if the exit strategy is to receive funds from a contract then we need to ensure the contract can be fulfilled and is large enough to repay the debt. A secondary exit strategy such as refinance or sale of security property is also usually sought as a back up.

9. How and when do you pay your referrers?

Referrers are paid 24 hours after settlement, with no “claw backs” for arrears or early repayment.

10. How quickly can you settle?

We can usually provide an Indicative Approval within a few hours. Caveat loans can be settled within 48 hours with a straight forward security and co-operative borrower. Registered first and second mortgage loans generally require valuations (and bank consent for 2nd mortgage) so will take longer.

11. How do you value the security properties?

PMA have a very flexible valuation policy which allows us to use a range of sources including existing valuations, desktop valuations and agent appraisals as well as full valuations depending on the lending scenario.

12. Do you do development finance? If so how does it work?

We get involved in development finance both as a construction financier and also on a second mortgage basis to assist completion when the banks won’t help fund cost overruns.

As with all PMA loans we are flexible and make sure our deal structure suits the requirements of the borrower.

13. What loan sizes do you do?

We are the exclusive Mortgage Manager for PMA Capital Ltd, which is our own Fund that specialises in loans up to $2 million. We can now also manage larger loans from $2 million to $50 million with our new funding pool.

14. What tips would you give referrers to give them the best chance of getting their application approved?

If you have a scenario you would like considered, please use our one page Quick App which provides us all the information we need to quickly assess the proposal and a basis to provide an indicative quote or discuss the deal further.

15. What was the most exciting deal you’ve worked on?

Exciting is not usually a word you use a lot in finance. I think the most satisfying deal was one where we worked with the client and broker to pay out the ATO and stop administrators being appointed to a sound business. The exit strategy of selling a property was finalised within the loan term. It was the perfect loan from start to finish.

16. What makes an ideal PMA borrower?

I think it is a borrower that is keen to work with us to get the funding finalised as soon as possible and then make every effort to carry out the exit strategy and repay the loan.

17. What do you think makes PMA the best at what they do?

Taking the time to listen to the broker and client and making sure the deal meet their needs.

18. What’s next for PMA? Any milestones you’re looking to achieve?

There is so much going on at all different levels. I think the rate of growth of PMA has been great and I am looking forward to doubling our loan book again over the next 12 months. From an operational perspective, we are building a custom software program to automate the assessment process and will shortly start looking for a new credit support staff member, to help manage the growth (and take up some of my workload).

 

Peter has a Bachelor of Business, Graduate Certificate in Corporate Finance and is a qualified CPA. He has over 30 years experience in finance and also holds a Diploma of Finance and Mortgage Broking Management, and has completed the Agile Project Management Foundation & Practitioner course.