shimself
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Post by shimself on Oct 2, 2014 19:16:26 GMT
I've taken the liberty of posting your Risks page in its entirety, seeing as I can get there without logging in Property Market Risk
Our loans are predominantly secured on residential or commercial property and the borrower’s ability to repay the loan would likely be affected if there was a dramatic downturn in the UK property market.
I'm probably showing my ignorance here (and if I am, I would welcome enlightenment) but a dramatic downturn in the UK property market would not necessarily entail a borrower's ability to repay, would it? However, in the event that a borrower was unable to repay, the value of the security might not be enough to cover the outstanding debt. Or am I just being pedantic? I think a lot of the borrowers from wellesley are builders/developers so in their case the warning is correct. If the borrower was some other sort of business it kind of depends on how well placed they are to survive the chaos which would go hand in hand with a property price collapse, so actually I think to say it's "likely" to be a problem is reasonable anyway.
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james
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Post by james on Oct 5, 2014 11:49:21 GMT
I'm probably showing my ignorance here (and if I am, I would welcome enlightenment) but a dramatic downturn in the UK property market would not necessarily entail a borrower's ability to repay, would it? However, in the event that a borrower was unable to repay, the value of the security might not be enough to cover the outstanding debt. Several possible issues: 1. For a property developer, the sale of property is income that is used to cover the cost of land, materials and construction before repaying borrowing. During a downturn property sales and property sale prices fall so the income could be substantially reduced, eliminated or even become negative if costs of stock like land, materials and completed properties exceed the profits from selling properties. For this reasons one biggish UK builder has adopted the practice of commencing new building only after a sale of existing stock, to try to limit their total exposure to unsold stock if there's a downturn. 2. The value of the property used as security would also fall, so 60% LTV might become 100% LTV or worse. 3. In some cases, perhaps not here, the security might be a property valued on its completion value rather than its value at its current state of construction. The difference between the value of an unbuilt, partially built and completely built or modified property can be substantial, so the security might not have the indicated value at the time it is needed. I don't think that Wellesley does this type of lending but I could be wrong. Considering only 1 and 2, a developer might secure a loan on their own office building, find they can't sell the new properties so they have no income to pay their bills for materials and labour already incurred and the office as security might not be saleable or lettable at any price due to a large increase in vacant office property. Initial recovery might be nil, though eventually the property would probably be sold to recover something. Unless it burned to the round while uninsured because the borrower had stopped paying the insurance premiums. Property is good security but combining lending to build property with lending secured on property increases the risk because both income to repay and security are in the same line of business. A teacher repaying out of teaching income securing a loan on their home would have two different potential streams of money to use in recovery. I don't think that the risk warning is really clear enough for the case where both income and security would be reduced by the same routine event, a property market downturn. Your own question appears to illustrate the problem of people not making the connection.
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Post by wellesleyco on Oct 6, 2014 7:58:35 GMT
shimself , james and ribble good morning I hope that you all enjoyed a good weekend. I think there is a difference that needs to be mentioned between a 'borrowers ability to repay' and a 'borrowers ability to repay on time'. With many of the Wellesley Borrowers who are property builders/developers the exit strategy for the loan is to sell the developed units. In the event of a market downturn, it may prove harder for the units to be sold at the market valuation on which the LTV is based. As we do manage relationships with our borrowers we would be informed if a loan were likely to overrun and any loans that are in arrears/default would be published on our website under our loan statistics. However this is not to say that the asset could not be sold and all the funds returned to lenders as the developer may just have to forego his profit margin, to avoid defaulting on his loan. Another exit strategy that some borrowers have in place is to repay their loan by re-mortgaging with a bank buy-to-let mortgage. (unless you are Ben Bernanke)* james in the event of ground upwards buildings/development, we work closely with Quantity Surveyors during the project so that we are never lending more than the LTV agreed. When the plot of land is just a plot of land, we will not be lending 65% of the Gross Development Value of the project. As on other conversations on this forum regarding why some loans are listed twice on the matching breakdown, this is due to the staged drawdowns so that we do not exceed the LTV. I understand your point made about Income & Security coming from the same asset class. While this is a valid point, I cannot provide a breakdown of each borrowers income also to you all! Our team of loan officers and credit committee are incredibly experienced in loan underwriting. Unlike some Peer-to-Peer lenders that are built on technology of underwriting algorithms, we are not. Our lending team scrutinises a great level of detail in the underwriting process and our credit committee only approves loans that we would lend our own funds to. This is because in the first instance the loan is fully funded by Wellesley and then we retain our funds in every loan on a sub-ordinated basis. Wellesley & Co loses their entire portion in a loan if a borrower defaults, before any of our Peer-to-Peer lenders. *Please note: current affairs joke, not entirely accurate in context and Ben Bernanke is not a Wellesley & Co borrower.
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james
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Post by james on Oct 8, 2014 0:43:47 GMT
Thanks for the correction on the construction lending. One of the relatively nice things about Wellesley is the loan size, which I think enables more due diligence than in say the consumer credit part of the market. So far as Mr. Bernanke goes, he might turn out to be a good customer if there's a rerun of the Great Depression, given his Great Depression history.* *possibly even more of an in joke than yours...
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shimself
Member of DD Central
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Post by shimself on Nov 19, 2014 11:27:49 GMT
Just thinking about what happens if one of your loans were to go problematic, would you withdraw it from the reallocation system?
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Post by wellesleyco on Nov 21, 2014 15:32:28 GMT
shimself thank you for your post. There are 2 ways that we would deal with a defaulted loan, in different circumstances. 1. In the event that a loan defaults, in circumstances where Wellesley Group has sufficient own funds and at the discretion of the Directors, Wellesley & Co would remove the loan from the auto-matching system and take it back onto the Wellesley & Co balance sheet. As all the lending is secured against tangible assets we are confident in the recovery of any funds that are lent out, given the low LTV. Wellesley & Co would then take any loss that was incurred. It is the Directors’ severest intention that no lender loses funds while lending through Wellesley & Co. 2. In the event that a loan defaults and Wellesley Group has insufficient own funds to take the loan onto its balance sheet, the auto-matching system would be paused, the defaulted loan and the allocated funds would be removed from the system, and then the auto-matching system would be re-started, so that any new loans/new lenders are entered into the system. This ensures that no new lenders are matched against a defaulted loan.
a. Wellesley & Co would then liquidate the security to recover the borrowed funds. In the event that Wellesley was unable to recover all the funds that were borrowed, Wellesley & Co would take the first loss with the retained portion of the loan, thereafter any loss would be the liability of the lenders. The lenders are eligible to apply to the discretionary Provision Fund for any losses to capital and interest payments during the liquidation and after. b. The bonus of the Auto-matching system is the level of diversification it gives lenders across the entire loan book, and the visibility as to the allocation of funds to each loan.
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