My Bondora portfolio recovery

Recovery is a topic that tends to divide investors into two camps. One half argues that no recovery is happening and that defaults are climbing at an incredible rate, while the others dig around the data and come to the conclusion that recovery happens, but it’s just overall brutally slow.

A lot of people also seem to be very optimistic about the impact that recovery will have on their portfolio. The best way of thinking about recovery (in my opinion) is hoping for an overall break-even. This means that overall, while with a time delay, you do not lose money on defaults. The actual returns come from the loans that are paying on time – and they are the majority.

This month though, my portfolio hit 1000€+ in defaults, which of course is not pleasant to look at. I have however been keeping track of recovery, and I’m not particularly worried here, it’s a matter of time. I threw together some quick Excel graphs to visualize my portfolio happenings.

How much do people really owe me?

totalrecovery

This graph is a simple money recovered – exposure at default (recovery-EAD2). As you can see, in raw numbers the debts are big, and you can easily see them piling up to 1000 euros. Now, where things get interesting, is where you normalize the recovery to a 1 to -1 scale, to take into account the actual loan size as well. In this graph -1 means that absolutely no recovery has happened, 0 means break-even point and anything above that is bonus.

totalrecoverynormalized

The timeline of course runs from left to right, so the oldest defaults (I have 149 defaults in total) are on the far left. You can clearly see that the older loans are much closer to being recovered, but there is significant time delay. (Take into account that the loans are lined up by the day I invested into them, not by the date of when they defaulted.) Overall to visualize this – the part between 0 and -1, the white area is what has been recovered and the blue is what should still be recovered. For me, the total recovery is currently close to 180€, but it’s clearly speeding up.

monthlyrecovery

Sadly monthly recovery is a disaster to actually keep track of, but I’ve been religiously taking screenshots of the recovery table on your statistics page ever since it got launched to track the recovery information there. For the past 4 months recovery has been more than 10€ every month, which might not seem like much, but if we look at the time delay then it’s reasonable to expect that it will keep accelerating. (I mean, for a long time recovery was less than 1€ per month.)

My Bondora portfolio (2015, September)

September wasn’t a very active month for me in Bondora. Due to having extra expenses (plane tickets!), then I only added ~20€ into Bondora this month. I’m on the wait to see what Bondora will announce for the new market system before adding in more money, since I’m 80% decided on starting a second Bondora portfolio under a business account. That still depends on what Bondora is set to do with their investments.

septemberinvestments

As you can see, a sad moment has arrived – the 60+ overdue has finally hit 1000€. I’ll be honest, it hurts a bit to look at 😉 . Especially, knowing the upcoming changes for how overdue loans will be handled. Still, I’m currently enjoying some digging around the dataset so I’ll be taking a longer look into defaults and recovery soon.

septemberinterestearned

The ‘bump’ of adding in some more money at the end of summer hit, making September a record month – total interest earned was 104,7€. Hitting 120€ by the end of the year from just Bondora is looking very unlikely, but I’m not too bothered by it since I’ve just added a bit of money into Estateguru, so that compensates for overall social lending.

septembertotalinvestments

As I said, not much money was added, so there is a bit of a drop-off. However, you can clearly see the impact of the new rating system by how the defaults are dropping off a bit. It of course hurts seeing 25€ pieces default, but I don’t track them too much.

septemberrecovery

Recovery is still going nice and slow. I’ll look into that a bit more soon, so I won’t go into more detail now. Overall, looking forward to new announcements! (Likely that they will happen after the Lendit conference though, so still a while to wait.)

My Bondora portfolio (2015, August)

Fascinating times seem to be waiting ahead in Bondora, but so far I’ve decided not to react much. Overall I’ve reduced the monthly amounts I invest into Bondora a bit (from 200-ish down to ~100€), and it’s already showing its impact in terms of the ratio of defaulted loans in my portfolio.

augustinvestments

Due to the fact that I’ve reduced new funds, then the % of overdue and 60+ overdue loans has started to grow quite a bit. Most days the ‘current’ floats at about 70%, and it’s slowly losing ground to problematic loans. Not sure if that’s signs of a recession yet, or just the rebalancing, but soon my 60+ defaulted loans will reach 1000€, which is undoubtedly a bit painful to look at!

augustinterestearned

While I’ve been getting a bit of recovery here and there in the form in principal payments, then interest earned has kinda stumbled to a stop. This month it didn’t manage to pass the 100€ marker, remaining at 99,09€. Hopefully next month I’ll be back over 100€, but any growth seems problematic due to the constant influx of defaults.

augusttotalinvestments

As you can see, then looking at the older months of investments, then the green in some of them will start to lose out to the red of defaulted loans. Since my first investments are now more than 2,5 years old, then it’s time to start drawing some conclusions, since just a while back Q1 of 2013 has hit break-even. (Meaning interest earned > outstanding principal.)

augustrecovery

Recovery wise it was an OK month. While the chart shows +1 loan fully recovered (Stage 5), then at the end of the month another loan was fully recovered and is probably waiting to be manually market into the 5th stage.

0109xirr

Since the numbers might seem somewhat pessimistic, then just to show that the case isn’t that bad, I updated my returns calculations, and while the pessimistic rate of return looks, well, pessimistic, then overall the numbers are fine. Also, since long term returns are slowly dropping, then a moderate 13-14% is perfectly fine as a long term return.

Overall I’m looking forward to what exactly Bondora is planning to do with all their new changes. Until then I’ll keep my strategy of slightly smaller monthly contributions and then maybe readjust depending on what’s the final product that they’re going to serve to investors.

The new Crowdestate project shows how spoiled investors are

This week, the Estonian real estate crowd funding site, Crowdestate listed a new terraced houses project, which differs from other projects in many ways. First being that the hope is to run the whole project without a bank loan, giving CE more freedom then usual since you’re not pressured by the bank to sell the project to pay back the loan. Secondly, the predicted returns are lower than other projects so far, and investors are behaving somewhat strangely.

cenewproject

The sum needed for the project is about 500K€, which is a bit more than usual, but nothing that the investors can’t put together. What is strange however, is that the project hasn’t filled up yet when most others filled up in a matter of hours. Looking at the discussions I’ve seen in many forums, then the main reason for that being the opinion that 10-12% predicted net return is “too low”.

Let me repeat that, many people aren’t choosing not to invest not because of risks associated or the fact that they don’t like the project (most people don’t do too much due diligence on the projects anyway), the main reason is that 10% interest earned on a passive real estate investment isn’t high enough to bother.

Expected returns?

Most people are going to have their bubble burst in a painful manner at some point. Due to social lending and crowdfunding becoming more popular and successes of some projects, private investors have ended up with a completely unrealistic expectation of how much money investments should make. To put it into perspective, when it comes to mostly passive investments:

12% return – Very good and optimistic in the long run

5% return – Pretty good, beats inflation

0% return – Yay! You aren’t losing money

Overall, I’d say if the project doesn’t fill up it would create an interesting precedent – people have a lot of money available but they’re not willing to invest it for an expected 10% return. This opens several possible options – 1) people who have money will be able to pick up good stable projects more easily, 2) investors hoping for super good returns will forever be stuck in analysis paralysis and wait for the “best” deal, 3) market will have to rebalance in terms of the scale of projects due to people being unwilling to lock down money, 4) it might turn out that CE has completely missed something in the risk valuation of this project. It will be interesting either way!

Are people who take out 90% loans stupid?

While the title may seem a bit harsh, this is the reality of what many people think – if you take out a high interest loan then there are very few reasons to do so, the top one being that the person taking out the loan is just plain stupid. Is that the case though, or is that always the case? If so, why are 90% loans even legal?

Maximum interest rates by law

Estonia is currently in the process of regulating maximum interest rates for loans. As it stands, the maximum is to be set at 3x average consumer credit rate, which makes the cap out to be at just about 90% interest. For any investor, 90% returns would be in the realm of magic, which is why such an interest rate for loans raises a lot of questions, why would anyone take out a loan with such an interest rate?

Loan eligibility

The answer to the question of why anyone would take out such a loan is easy – they aren’t eligible for any other loans. It seems some people (often investors) forget, that the majority of the population isn’t as well off as they are. Whether or not you’re credit worthy depends on many different aspects, and once you fail too many criteria it’s easy to see the interest rates climbing.

Having a low paying (or minimum wage) job, living outside of the capital, having multiple children, not having enough education etc. are all warning signs for creditors that increase your risk levels exponentially. While most people who have their finances in order can easily enjoy the chance to take out 9-12% consumer credit loans when necessary they are definitely a minority in the population.

This is one of the reasons why I’m in favour of capping interests, but against outlawing things like SMS loans for example. In Estonia, SMS loan has more than 100 000 customers! They are clearly offering a service that people need (and I agree that it’s super sad how many people need the service!). However, if we ban the service, what will people do? Steal? Get illegal loans from someone? While we can and should educate people, just cutting people off from money when they need it is not a good plan in the long run.

How bad are 90% loans?

Many people (rightly so!) believe that 90% loans are super expensive in terms of interest paid in the long run. The problem being, most people don’t really assess their loans in terms of the ratio of interest vs principal but they look at the monthly total payment. If they can afford the monthly payment then everything is OK, despite the fact that the interest rate might be insane.

90percentinterest

I made a chart that shows monthly payback sums for a 1000€ loan with various interest rates for 1 year and 3 years. While you can see the totals climbing at an alarming rate, you don’t see the steep growth for monthly payments – every 10% of extra interest only increases the payment by about 5-6 euros. That’s not enough to make people really consider not taking out the loans.

How to fix this?

As boring as the solution is, then more financial education is the way here. How effective that would be, is however, questionable. The high interest loans are theoretically OK as long as people are capable of making the payments.

The problems arise when people miss payments, and the interest and penalties start stacking up at an alarming rate, causing the situation where the interest owed is multiples of the original principal payment. That’s when we have a problem that has caused tens of thousands of Estonians to default on loans and the law has failed to protect them from their “stupidity”.

However, it’s not just stupidity that’s making people take out high interest loans – it’s lack of financial awareness, its difficult financial situations and a lack of emergency funds and living from pay-day to pay-day, all of those not as easy to change as we’d wish them to be.