RATESETTER is changing the way it deals with defaulted property development loans, which could involve taking control of the project and completing it itself.
The peer-to-peer lender said on Wednesday that if a property development is only partially completed and has gone into default, it will now examine whether maximum value would be delivered via an immediate sale or by completing the development and then selling it.
If additional finance were required to facilitate the completion and sale of the property, that would come from the RateSetter market, the company said, with a threshold for total lending of 80 per cent of the property’s post development value.
These changes, which take effect on 1 December, will impact how property development loan defaults are treated by RateSetter’s provision fund.
Currently, the full outstanding balance is charged off from the provision fund, which repays lenders and makes recoveries by selling the uncompleted development.
Under the new approach, if RateSetter takes control of the development, it would charge off the expected loss from the provision fund rather than the full outstanding balance.
RateSetter said that this added flexibility would deliver better outcomes for lenders and would be consistent with the approach already used in the wider finance industry.
“This change gives us a better chance of maximising recoveries, which could deliver more money back to the provision fund,” it said. “We do not believe that this update affects the risk of lending via RateSetter.”
The change will not impact expected future losses or the current provision fund coverage ratio. However, a future property development loan default would have a smaller impact on the coverage ratio as it is only the expected loss that would be charged off, rather than the full outstanding balance.
Property development loans make up 11 per cent of RateSetter’s active loan book, with 61 development projects completed so far.
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