Seeing a loan going into default status in your portfolio can be scary, but there is no need to panic.
Regardless of how strictly a risk process is applied, defaulted loans are a (mercifully small) part of life when it comes to investing in real estate-secured debt.
As a platform and business, Estateguru has an incredibly strong track record of recovering defaulted loans thanks to the fact that every loan we facilitate is backed by a mortgage on real estate.
Here we’ll explain the details of when a loan is considered in default, our process when dealing with such loans, and our loan recovery procedures.
Please also read our guide on late loans for a deeper understanding of this process.
– When is a loan in “default” status?
Loans that are ‘late’ for longer than 30 days will be actively managed by the debt management and risk teams. A special workout plan will be devised for each borrower and loan, with the aim of resolving the late payments and/or getting the borrower to repay the whole loan. If all the options within the workout plan have been exhausted and we do not see any intention to repay the loan, we will place the loan into default status and start a separate process to sell the asset and repay the investors’ money through the legal enforcement procedure.
– How common is this both inside and outside of Estateguru?
In the short-term bridge loan sector, it is not uncommon that borrowers are unable to execute all their plans within the short 12-18 month period.
In the real estate and construction sector, some plans could be postponed due to circumstances beyond the borrower’s control. For example, delays related to bureaucracy in issuing legal permits, delays related to the buyer of the property or delays related to the refinancer of the loans.
For most borrowers, it means that they have to prolong or refinance their loan, pay the extra costs relating to the prolongation of the loan (from their own equity), take a new investor into the project, or sell the project.
If the loan payment is delayed, Estateguru’s debt management and risk teams, together with the borrower, will actively search for the best workout plan and solution. In the majority of cases, we are able to work out a restructuring plan or a sales plan that resolves the situation before the loan goes into default status.
From the overall outstanding portfolio, only a small percentage of loans will go into default. The maximum targeted default level for the overall outstanding portfolio, set by Estateguru’s management, is 5%, which is also the financial sector standard level in the short-term bridge loan sector. So far we have been able to keep to the targeted level and recover the loans according to our plans and with positive (over 9% annual yield) returns to the investors.
– What is the process after a loan goes into default?
We have a separate blog post relating to what happens when a loan goes into default, which you can read here.
You can also read this interview with our Head of Credit Risk, Andres Luts, about our general approach to risk management.
It is important to understand that, in the banking and financial sector, defaults are an inevitable part of doing business and that the eventual outcome depends on how well the company is able to resolve them, how much exposure they have taken on, and the security for the investment. Once a default occurs, it is not a matter of whether the risk assessment process missed certain details. It simply means that certain risks (market risk, borrower risk, operational risk or something else) have become a reality.
Estateguru has strong risk and debt management teams in the different countries in which we operate, and we have also established strong cooperation with our liquidation partners therein. Moreover, Estateguru also has a security agent in each of the countries where we operate.
– What should investors expect when a loan goes into default?
All the loans on the platform are secured with a mortgage on the real estate collateral. If the loan defaults, we initiate the foreclosure process to sell the real estate collateral. The statistics about defaulted and recovered loans are provided on our statistics page: https://estateguru.co/portal/statistics/
From more than €20M of recovered defaulted loans, the average return of fully recovered loans stands at 9.16% and the average term from default to fully recovered status has been 10.6 months. N.B. These numbers are dynamic and subject to change as we recover more loans. They are accurate at the time of publication. For completely up-to-date numbers, please check the statistics page.
– How do we make sure investors will not lose money despite a loan being in default?
To start, we have set up a very thorough due diligence process for our borrowers and projects in each country which is executed by a strong and experienced risk team.
We have also set up a security agent structure and a network of trusted, top law firms representing us and our investors in all the situations in which late and defaulted loans require us to.
In case of default, investors can be sure that Estateguru’s dedicated risk and debt management teams represent their interests in conjunction with top local debt collection and legal partners in each region.
The success of these efforts is best demonstrated by our loan portfolio statistics, which show that in the vast majority of cases, investors still earn considerable returns on recovered defaulted loans.
– How often do investors lose their money? What is the historic percentage?
The statistics about loans that have been written off are provided on our statistics page: https://estateguru.co/portal/statistics/
Throughout the company’s history, in a historic portfolio that amounts to over €600M in funded loans, there have been only two minor write-offs, totalling an amount of €40 121.
NB: As above, this amount is dynamic and subject to change, so please always check the latest amounts on our statistics page.
– Where can you find more information about this topic and/or legal terms?
We have a quite detailed and thorough statics page: https://estateguru.co/portal/statistics/
Investors can choose from the historic portfolio, outstanding portfolio and user statistics to see detailed information on late, defaulted and recovered loans.
At the bottom of our home page, you will find the LEGAL section, where the most important legal terms and information are provided.