If you're not making the monthly payments then that's still a default. I don't see how the interest changes anything.

I guess you could argue if the bank is not paying interest on that money, then they won't lose anything if the client is in default. I think there's probably still opportunity costs to the bank in that case - they could be loaning that money to a client that pays additional fees and makes the payments on time. But I imagine they would still foreclose and sell the asset to recover the principal in that case. Which might turn a profit for them.