Hi I need some help with this question: Mary believes that the ten percent required down payment will protect the bank from a loss of principal. However, should the loan default, the funds are likely to be tied up, without interest income for six to nine months. The funds could have been used to fund a prime loan at around six percent interest with a default rate of well under one percent. Mary is wondering whether or not the two percent premium paid on the performing loans will cover the expected loss from the nonperforming loans. She expects a potential default rate around 3-5 percent. The average home loan is about $200,000.

A model answer from an instructor's notes is: Each loan brings in an additional 2 percent in interest payments. If the loan becomes delinquent, the bank will suffer an interest loss of about $12,000 from the loan. This is nine months interest on a $200,000. Assuming that Mary is correct in assuming that the 10 percent down will protect the principal, one year's payment stream from six loans would maintain the income stream. The question then is how long will the bank actually suffer the loss in income and does the principal have protection. Additional costs could include: repairs to a damaged property, costs to sell the foreclosed property, and maintenance costs during the holding period. Planning for a potential ten percent seems very high and, even with the recovery of most of the loan principal, is likely to place the bank in severe difficulty.

Can you provide a more in depth explanation of this answer so I can understand it better?