Every NPL (Non-Performing Loan) portfolio comes to market with a narrative. The numbers are organized, the documents appear complete, and the discount is calculated to look attractive. It is precisely at this moment, when everything seems to be in place, that the most costly due diligence mistakes happen. Anyone who has been in the distressed credit market long enough recognizes the pattern: it’s not the bad portfolio that surprises you; it’s the portfolio that looked good.
Felipe Rassi, a specialist in distressed credit, observes that most problems encountered during the collection or foreclosure phase originate from decisions made during due diligence, or from questions that should have been asked but weren’t. What separates a robust portfolio analysis from one that merely confirms what the buyer wants to see is, almost always, the willingness to look for what could go wrong before signing anything.
Treating Due Diligence as a Bureaucratic Formality
The first mistake is also the most silent. When due diligence is conducted as a confirmation process rather than an investigation, it loses its primary function. The analyst verifies that the documents exist, the signatures are present, and the amounts match the seller’s report. Everything checks out. The deal moves forward.
The problem is that a confirmatory due diligence only answers the questions that were asked. It won’t find a contract missing spousal consent if no one checked whether the collateralized asset is a family home. It won’t detect a prior, unrecorded assignment if no one traced the chain of title back to origination. It won’t identify a debtor who transferred assets in the months leading up to default if no one cross-referenced the dates. Effective due diligence begins with the right question: what in this portfolio could derail the recovery projected by our model?
Valuation of Collateral Based on Origination Value
Real estate and tangible collateral age poorly when they aren’t reevaluated. A property pledged as collateral at the time the credit was granted may have undergone significant changes in the following years: market appreciation or depreciation, squatted or irregular occupation, new liens, physical deterioration, or changes in local zoning laws. None of these changes appear in the original contract.
As Felipe Rassi points out, valuing collateral at its origination value is one of the most common and expensive mistakes in NPL portfolio analysis. The relevant value for pricing is what the collateral will actually yield at the moment of foreclosure or liquidation—after deducting court costs, enforcement timelines in that specific jurisdiction, and potential disputes over the validity of the lien. This figure is rarely the same as the one in the contract, and the gap between the two can completely change the economic equation of the deal.
Ignoring Debtor Geography
An NPL portfolio is not an abstraction. Debtors exist in specific places, and those places have judicial systems with vastly different speeds, costs, and ruling tendencies. A foreclosure that takes an average of two years in a certain judicial district might take five in another, for the exact same type of credit and collateral.
This geographical variance is rarely modeled with the care it deserves. Analysts often apply uniform timeline and cost assumptions to the entire portfolio, as if an enforcement action in a state capital functioned the same way as one in a rural, single-judge district with a backed-up docket. The result is a model that systematically underestimates the financial cost of time. As Felipe Rassi highlights, portfolios with seemingly identical debtor profiles and document quality can have radically different actual recovery rates, depending solely on where the debtors are located.
Underestimating the Legal Cost of Recovery
Modeling the recovery cost of an NPL portfolio using only attorney fees and court costs is insufficient. The true legal cost of a distressed credit operation includes the time spent by analysts tracking cases, the costs of locating and skipping debtors, expenses for the appraisal and maintenance of seized assets, the costs of potential evictions, and losses associated with claims that expire due to a statute of limitations because of prioritization errors.
According to financial market specialist Felipe Rassi, underestimating legal costs is one of the factors that most distorts the pricing of distressed credit portfolios in the Brazilian market. When these expenses hit during the collection phase without being forecasted in the model, a deal that seemed balanced starts consuming more than it delivers. The margin that justified the discount paid vanishes—not because the portfolio was bad, but because the cost of operating it was poorly mapped from the start.
What Does Well-Executed Due Diligence Actually Deliver?
Due diligence in NPL portfolios is not a process that ends with a checklist of verified documents. It ends with a clear view of what can go wrong with each credit, how much that would cost, and how it impacts the price that makes sense to pay for the portfolio. It is a risk-mapping exercise, not a narrative-confirmation exercise.
The distressed credit market in Brazil has grown in both volume and complexity. Growing in analytical maturity is the next step, and it begins with a willingness to conduct due diligence that asks the hard questions before enforcement forces them upon you. Ultimately, Felipe Rassi points out that this shift in mindset is what will determine which players build consistent results in this market over time, and which ones continue to be blindsided by problems that were already in the portfolio when it was bought.
