Why Understanding Defaults is Crucial in Private Mortgage Funds

Defaults. It’s the word that often sends a chill down the spine of investors. But here’s the thing—defaults aren’t inherently bad, and in private mortgage funds, they’re often misunderstood.

One of the biggest misconceptions I encounter is the idea that a “default-free” portfolio is the ultimate goal. On the surface, it sounds great—no defaults, no problems, right? But here’s the reality: if you’re chasing higher returns, defaults are part of the equation. The key is how they’re managed.

In our conversations with investors, I always advise asking deeper questions. It’s not just about whether there are defaults in the portfolio—it’s about understanding the terms of the loans. Have payment terms been modified? Are there payment-in-kind structures where no physical payments are being made, but interest is accruing instead?

The real work begins when a default occurs. A disciplined fund manager doesn’t shy away from recognizing a problem. They provision for it—let’s say a loan originally valued at $10 million now seems worth $9 million. That $1 million provision ensures the NAV (Net Asset Value) reflects reality, protecting the portfolio and, most importantly, the investors.

At Steepe & Co., we don’t just accept defaults—we anticipate and manage them. We focus on selecting managers with a proven track record in handling workouts and navigating risk effectively. This approach allows us to protect investor capital while delivering risk-adjusted returns.

So, if you’re considering private mortgage funds, ask yourself: Do you want a manager who avoids the hard decisions or one who tackles them head-on?

Curious to learn more about our approach? Explore our insights at Steepe & Co. and see how thoughtful risk management can deliver consistent results.

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