Hello all,
Thanks you in advance for your assistance. Working on a loan model where a loan has defaulted and has not paid interest since April. Historical interest that is not paid is being accrued and compounded. For valuation purposes on projected cash flow, we differ in opinion, between another senior guy who insists that he is right and the other person is dumb. He insists that the forecast interest should compound monthly. It does not make sense to compound interest on forecasted projections to scenarios extending to 18 month and 36 months. Feels like we are hitting the loan too hard. What if the borrower starts to pay in 3-4 months, we are already factoring in a default rate. Would greatly appreciate any input.
Thank you
Pre acceleration the convention is usually interest + default interest + late fees with no compounding.
Once you accelerate, all of the interest, default interest and late fees are tacked onto the OPB and then if borrower doesn’t pay, you start calculating interest based on that higher balance. It is simple interest (higher balance*default rate*days/365), not compounding though.
Also, I just noticed that you said that you are accruing and compounding the interest not paid since April. You can try and collect that $, but most lawyers will tell you that is a losing battle in court. You haven’t actually advanced those dollars to the borrower, they are just owed to you, so judges won’t let you compound.
now if you had an agreement that with the borrower that allowed for it (like a deferral/forebearance agreement), then that is a different story.
Read the loan agreement but I doubt the interest can compound. Most likely simple interest. Also keep in mind a lot of times the collateral is the only collection source even with some PGs. They can always just BK discharge.
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