Special Feature
Second chances The risks associated with secondary security Philip Knight Credit & Risk Director Asset Advantage
3. The borrower cannot easily dispose of their home (although not impossible) so as to save it from being called in as part of the personal guarantee. 4. Having a home makes it easier to locate the borrower/guarantor.
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ecurity performs two quite distinct purposes. At its most basic level, it gives the lender a secondary recourse beyond the borrower’s credit covenant. Equally important, in my view, is how it drives customer behaviour. The taking of security is not just about putting in place a fallback should the borrower default, it’s about encouraging the borrower not to default. Further, a skilfully deployed security package can minimise the opportunity for the more unscrupulous borrower to avoid their obligations. Let’s take the humble personal guarantee as an example. Whilst the failure of a business is clearly impactful on shareholders and creditors, the pain is considerably greater for the borrower who has personal assets on the line. It doesn’t take much imagination to appreciate how much harder a borrower might work to save their business if their home is at risk. A personal guarantee that includes the guarantor’s home provides a lender with several layers of comfort: 1. The borrower has gone through and passed the mortgage lender’s due diligence and affordability process. 2. The borrower’s asset can be ascribed a definitive value, i.e. the equity in the home. 42 | NACFB
Property charges are obviously the meat and drink of specialist property lenders. They can also be useful in supporting personal guarantees, or where a business has a property asset, ensuring that the personal net worth statement used to support the personal guarantee remains relevant. Without such a charge the property can be sold and the cash squirrelled away or the guarantor’s ownership switched to their partner. However, it is important to acknowledge that this type of security
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Security comes with many pitfalls and it’s not for nothing that many underwriters state that security does not turn a bad deal into a good one, and this can be hard for brokers and their clients to understand