What has happened?
Hipocredit is a mortgage lender that sells loans on the Mintos platform. Until April 2017 the shareholders of Mintos were also owners of Hipocredit. They sold the business to new (unnamed) owners in April. The new owners have since obtained a €3 million funding line for the business on attractive terms.
During September, Hipocredit has been taking advantage of the terms and conditions of its agreements with Mintos investors to selectively repurchase loans back from investors. The loans repurchased were those with the highest interest rates and the best payment histories. No loans with overdue payments or defaults have been repurchased.
Why does this harm the investors of Hipocredit?
We think that this behaviour of Hipocredit, while legal, will be very damaging for its reputation on the Mintos marketplace. Up to now, most investors have not been made fully aware of the ‘call option’ feature that is embedded within the fine print of the Mintos contracts. These provisions effectively allow lenders to ‘cherry pick’ the best performing loans that they have sold to investors and repurchase them when they are able to obtain cheaper funding than they are paying to investors on the Mintos platform. Loans with weak performance or defaults can be left with the investors.
We also note that many Hipocredit loans have been purchased on the secondary market at premiums. While these investors have always known that they face the risk that borrowers make early repayments, they now face a second risk that lenders will repurchase their loans back from them. Many Hipocredit investors who purchased loans on the secondary market will be nursing losses as a result of their actions.
Many investors are understandably unhappy with how Hipocredit has acted.
What can be learned from this?
We think this highlights some new hidden risks from purchasing loans at premiums in the secondary market. We have always been wary of paying more than 2-3% in premium (regardless of the yield to maturity). The actions by Hipocredit indicate that significant caution needs to be taken to paying premiums. Other lenders may choose to follow their actions as the alternative costs of funding fall.
Clearly it means that investors should not purchase any Hipocredit loans at a premium on the secondary market. In fact we would argue that their actions make it questionable whether any of their loans should be purchased in the future. Investors run the risk that they could have their best loans taken from them and be left with underperforming loans. Hipocredit’s behaviour makes it very difficult to assess what the expected future return is from purchasing their loans.