Defaults Aren’t Always Defaults: The Hidden Truth Behind Loan Modifications

When most people think of a default, they picture a borrower missing payments and a red flag waving over the loan. But in private mortgage funds, it’s rarely that straightforward. Understanding defaults—and what they’re not—can make or break your investment decisions.

A default isn’t always about missed payments. Loan terms are often flexible, and lenders can modify them to accommodate borrowers. For example, a borrower who misses three months of payments might not trigger a default if the lender extends a payment holiday. Similarly, some loans use payment-in-kind terms, where no payments are made until the loan matures, meaning there are no defaults by design. These loan terms can be beneficial for the borrower and keep the loan technically "performing," but they can also help to mask underlying risks.

As an advisor or investor, the real question isn’t, "Are there any defaults?" Instead, ask:

1. Have any loan terms been modified?
2. How many loans have switched to payment-in-kind arrangements?

‍

How do you define a default and when do you take provisions for losses?

These questions dig deeper into the portfolio's risk profile. A fund with no reported defaults might still harbour vulnerabilities if numerous loans have been restructured or extended.

At Steepe & Co., we emphasize transparency in our funds. We want investors to see beyond marketing gloss and into the realities of loan performance. The true value of a private mortgage fund lies not just in its returns but in its resilience and the honesty of its management.

If you’re ready to learn more about asking the right questions—and finding the right answers—contact us today. Together, we’ll demystify private mortgage funds and help you make informed investment decisions.

Explore more insights and opportunities with Steepe & Co and book a meeting with Michael Steepe.

‍