Distressed Mortgage and livestock as security for loan
- There has been a spike in the number of mortgage refinance rejections lately.
- AR Mortgages helped a client who was stuck in the similar situation.
- Unlike other lenders, AR Mortgages refinanced the loan by taking PPS charge over the livestock.
- The use of RFID embedded ear tags minimizes the difficulty in managing and identifying the livestock.
- Borrower’s business is better than expected and are intending to pay us out either refinancing or by the sale of properties.
The decision about whether or not your loan is approved is dependant upon many factors such as the amount you apply for, income sources & cash flow, credit ratings, collateral and so on. Not everyone will meet all the criteria. Even though you meet all the criteria and your loan is approved, the chances are that you might not be able to refinance the loan when you want it which means that the borrowers can get stuck and will be unable to move to lower rates offered by banks and non-bank lenders. Data from UBS shows that about 40% of mortgage refinance application was rejected in 2018, whereas it was only about 5% back in 2017. The reason for this is the higher bar set for the loan following banking reform and the fallout from the banking royal commission.
This case study is about a client who was in a similar situation around late last year. They were trying very hard to refinance the loan and consolidate their debts but were unable to do so. They had a mortgage loan of around 1 million Australian Dollars with one of the reputed banks in Sydney and were paying the interest on time. However, due to some catastrophe in the business, they missed the interest payments for two months, but rectified the default and made on-time payments thereafter. They approached many lenders and filled several loans refinance applications. However, most of the lenders declined to refinance their loan because of the solvency issue in the past and not having enough equity in the securities they were pledging as collateral. In addition to the equipment and lands, the borrower was willing to pledge their 350 cattle as security, but the lenders were hesitant to keep that as a security.
After being frustrated for months, they came to AR Mortgage and we studied their situation and their business in depth. We also were aware that their loan was in default for two months due to mishaps in the business and decided to help them because we do not only help the clients and offer our services to the ones who have an excellent track record of the business and can offer the best security as a collateral, we also help the ones who have been through the rough roads quite a few times and still manage to overcome the hurdles. AR Mortgage also believes that past performance is not always the best predictor of future success.
We refinanced their loans with the competitive rate by taking the following securities for the loan:
1. A first registered mortgage over the two lands in NSW
2. A specific Personal Property Securities (PPS) charge over machinery and equipment.
3. PPS charge over 350 livestock with Property Identification Code PIC NXXXXXXX
PIC is a unique eight-character number assigned by Local Land Service to properties with livestock in NSW. If someone has livestock, then it is the requirement under Biosecurity (NLIS) Regulation 2017 and Biosecurity Act 2015 that the property has a Property Identification Code (PIC).
What made AR Mortgage unique is that it helped the client in distressed situations by accepting livestock as collateral. Most of the lenders are hesitant to keep livestock as collateral. They believe that unlike other securities, such as land and buildings that can be kept as security by registering first or second mortgage or caveats, or equipment that can be secured by PPSR interest or PMSI, livestock carries difficulty in keeping them as a security. This is due to the complication in managing and identifying them. However, this is not true. It’s easy to find out the cattle because they are kept in the registered PIC and each cattle has a Radio Frequency Identification Device (RFID) embedded ear tags which are used to individually identify animals on the registered PIC location.
AR Mortgage made sure that they are secure with cattle as one of its major securities by keeping a special condition on the loan that if the number of cattle is reduced by more than 20, the borrower needed to notify the lender. Furthermore, the cattle were insured, and AR Mortgage instructed its inspectors to have those cattle inspected every few months to monitor their health and conditions. In this way, everyone is happy and satisfied.
Now, the loan is in its midway and everything is going all right. The borrower’s business is taking momentum and they are intending to pay us out either by refinancing or by selling the properties in the next six months.