Paradoxon: Why I Select Non Performing Loans to Invest Into at Indemo

If you read any other article on the this blog typically one aspect is how to gauge the risk, that the loans I invest into will default and how to minimize this risk by diversification or other measures. Today I will write about a new platform, where I specifically target non-performing mortgage loans in Spain as basis of my investment. At Indemo* I invest in notes, which are a discounted debt investment (DDI) consisting of 8 underlying non-performing loans.

This is the way it works: DDIs are built on the basis of underlying mortage loans, where the borrower has defaulted and the bank, which was the original lender, has decided to sell the debt at a discount in order to get it off their books.This debt was then bought by a servicer, which can refinance by offering linked notes on the Indemo* platform.

The servicer can act more agile than the bank and has several options to collect on the debt:

  • Or the debtor passes the keys of the property to the the servicer, and the servicer releases the debtor from part of the excessive debt and then then sells the real estate on te market. Another option is that the debtor or the servicer finds the buyer for the property, sells the property and the debtor is partly released from the excessive debt. All properties on Indemo mostly are secondary residences.
  • The target collection scenario for the servicing company is to settle the debt pre-court. If that strategy fails, it can file for a court claim and thereafter have the property auctioned

indemo note
Example of a note I have invested into (click on it to enlarge)

Each note consists of 8 different properties in Spain.

The objects list view shows:

  • Appraisal: the value of the underlying asset appraised by an independent company
  • PTV (price to value): PTV is calculated by dividing the price paid for the discounted debt by investors by the value of the property. E.g. in the second property 41%. The appraisal value is 429,404 EUR. The debt was bought for 177.000 EUR.
  • Term (M): Expected term in months
  • ‘Exp. Return’: Expected annual return rate based on a moderate scenario, where 90% of the debt is settled within 18 months
  • Status: current status

indemo flow
Flow view, showing the status progress of each loan in the note (click on it to enlarge)

It is important to understand, that an investment in a DDI note on Indemo*  does not produce a constant cashflow for the investor. Once each attached property is sold for its market value, the investor receives a 50% profit share from the differential between the discounted price paid for the debt and the proceeds from the sale of the property. Usually, the average discount for objects placed on Indemo platform is around 40%. The investor gets repayment of the part of the investment amount and profit allocation once each and any debt in the basket of eight debts is recovered. In the flow chart pictured above the progress of each loan is shown.

Furthermore it should be clear, that this is a high risk investment and the the projected attrative yield of 15.1% might actually turn out higher, lower or even produce a loss. More on the sceanrios that are base for the calculation of the projected return can be found on the Indemo website.

The Indemo product offers

  • a novelty factor – discounted debt investments are not typically available to retail investors as a product
  • an interesting return/risk ratio. Considering the high discounts the debts are acquired for, there seems to be enough buffer even in challenging market environment conditions on the property market

I had the opportunity to discuss the pros and cons of the product on several occasions with the Indemo management team. I visited them in their office in Riga in May.

Indemo is fully regulated and licensed by the Latvian regulator. Indemo has so-called passports as an investment services company in several European countries, and is also member of the European Union investor compensation plan up to 20K EUR per investor (note this is against Indemo failure, not against loss of investment, read the specifics). Debt servicing and collection is performed by a professional servicing company authorised by the Bank of Spain according to Law 5/2019, of March 15, regulating real estate lending entities.

Investor signup on the Indemo* platform is pretty straightforward. First an identity verification by Veriff, thereafter answering several questions to determine product suitability. After that is completed the investor can deposit funds and invest. Indemo does not charge the investors any fees.



Little Progress in MYC4’s Recovery Attempts

As reported in the past has serious operational problems making it an investment with negative ROI for the vast majority of lenders. MYC4 has taken measures to recover as much of the outstanding loan amounts as possible, but progress is very slow.

This is a quick update on the situation

Kenya / Provider Ebony:
The receivership has been in place for two months now, but has recovered only a small amount. The court case against Ebony Capital Ltd. is ongoing still awaiting a ruling. (see details)

Ivory Coast / Former providers Ivoire Credit and Notre Nation
The responsibility for collecting these loans has been turned over to TRIUM International in September 2009. In the 5 months since then TRIUM International collected 17,848 Euro. TRIUM has asked to be relieved of the contract as soon as possible (see details)

Senegal / Provider Birima
Repayments have been delayed. Birima cites technical problems and a bad economic situation in Senegal.

Uganda / Provider FED/CMC
FED seems to have the worst status. MYC4 reports that collections nearly stopped due to a lack of staff and  working capital. Borrowers are said towithhold repayments in speculation on a collapse of FED/CMC.
MYC4 has defined 10 action steps for March and April. (see details)

Continue reading

MYC4 providers react on high default rates

Over the last months it became clear that loans default at a much higher percentage then expected. MYC4 management states several growth and quality problems that led to the situation. Better training of the local providers, partner ratings, spot audits and a license system are measures that shall improve the quality in loan selection and management in the future.

Currently one challenge is to deal with the failing loans issued in the past. The earlier problems with Ivory coast loans continue. About half of the issued loans were insured by the organisation MISCOCI against defaults. MISCOCI failed today and is reported to be bankrupt. MYC4 has announced a few minutes ago, that they will publish until March 20th, what this means for the lenders on the defaulted Ivory Coast loans (MISCOCI covered 242 loans with an outstanding balance of 388,644 Euro).

NotreNation, one of the providers in Ivory Coast, yesterday named poor selection of borrowers by inexperienced credit agents and the difficult economic situation in Ivory Coast as reasons for high default rates.

GrowthAfrica, a provider in Kenya with a high portfolio at risk rate (PAR) has announced yesterday that it will buy back 65 very poorly performing loans at 95 percent of the balance from the lenders. This step was taken as GrowthAfrica felt they share responsibility for the poorly performing loan portfolio. GrowthAfrica expects to buy back loans for more then 125,000 Euro in total.

Which of my predictions for p2p lending trends 2008 came true?

In January 2008 I made some predictions what might happen in p2p lending this year. Now I’ll check on those (the black colored text is the original text, the green and red texts are the review as of today):

More competition and entering more national markets (probability 100%)
In many markets multiple p2p lending services will compete for the attention of lenders and borrowers, especially in the largest market: In the United States and will launch. In other markets, where there is no national p2p lending service established yet (e.g. Canada, New Zealand, Spain), p2p lending will be introduced by the launch of a service.

Loanio did launch, but went into quiet period shortly afterwards. As did Prosper. Zopa US closed. Fynanz launched. Competition in the US is in fact lower than at the End of last year. Internationally several p2p lending services launched.

Insurance against defaults (probability 75%)
Not totally new, since and already offer some protection of the loan principal. Insurance can be implemented as a classical insurance product (supplied by an insurance company) or as a market mechanism, spreading the risk over multiple loans.

Several p2p lending services offer insurance.

Secondary market (probability 25%)
One of the disadvantages for lenders currently is that on all p2p lending platforms, the invested money i locked in for the duration of the loan term. has already announced that it plans a secondary market, enabling lenders to sell and buy loans any time. Depending on the market there are huge regulatory hurdles to allow trading of loans. For example German executives told that on the German market a secondary market is unlikely for years to come.

Zopa Italy and Lending Club introduced secondary markets.

Cross-market lending (probability <25%)
Aside form the social lending approaches (Kiva, MyC4, Microplace) so far all service are open only for lenders and borrowers that live in the same market. If lenders could lend to borrowers in markets with higher key interest rate than the market the lender lives in, the advantages could outweight the risks. In the European Union due to the Euro zone there would be no currency exchange risk. Again there are steep regulatory hurdles to be taken.

Has not happened.

Variable interest loans (probability ?)
So far all loans are for fixed terms (prepayment allowed) with fixed interest rates. Variable interest loans could add flexibility. The interest rate could rise or decline following an indicator (e.g. market prime rate). Another possibility would be a mechanism where the variable interest rate would rise or fall as a result of the level of defaults of the credit grade. This could protect lenders, if the actual default ratio is higher then the forecasted default ratio.

Fynanz loans have variable rates. But this is the only example so far.

Third party bidding management (probability?)
Just a thought. Lenders could allow a third party to manage their portfolio. Like an investment funds the lender would invest an amount of money, while the funds manager does the actual selection of loans. This could possibly be done by a sophisticated software (would you trust this?) selecting loans by statistical analysis of performance of loans with similiar parameters or by a fonds manager. The later is unlikely because the amount of time needed for each loan is too high to be covered by fees.

Prosper introduced bidding via API in February.

I’ll publish my p2p lending predictions for 2009 in January.

Checking on MyC4 late loans

Lenders at do not have an easy task, when trying to check which of their loans are late on the repayments. The account page does not offer a comprehensive overview page. If a lender really wanted to check in detail he has to click through to the detail page of each loan he invested into.

Officially only one loan has the status ‘defaulted’ so far. However MyC4 so far has no standard policy when a late loan is to be declared defaulted. MyC4 has stated that there will be a default policy by the end of August.

Researching the situation, there are more than 320 loans that are late (fully or partly) with at least one repayment. Of these 72 loans are 3 payments late, 64 loans are 4 payments late, 30 are 5 payments late and 22 are 6 or more payments late.

Another issue that raised some concerns are the first impacts of the changed rules regarding currency risks.

… as some of you might have noticed already the first repayments are now posted on the investors accounts from Kenian investments where we investors are now taking the risk of currency fluctuations.

Within the first period from disbursement to the first repayment the KES has devalued from 97 to 104.5 = 7.2% already. … (Source: see discussion here)

To help lenders selecting loans to invest in, a column with the information whether a loan open for bidding is issued in local currency or in Euro was added to the wiseclerk MyC4 statistic pages.

(Source: uses information from Status der … MyC4 Kredite)