Defeasance and Your Deal PDF
Defeasance and Your Deal PDF
Defeasance and Your Deal PDF
Lender
Loan Payments
Borrower
Operating Income
Real Property
REMIC Trustee
Mortgage or Deed of Trust Lien Collections
Bondholders
Servicer
Loan Payments
Borrower
Operating Income
Real Property
REMIC Trustee
Collections Lien on Defeasance Portfolio
Bondholders
Servicer
Loan Payments
Borrower or Purchaser
Operating Income
Successor Borrower
Securities Proceeds
Real Property
Defeasance Portfolio
2005
$2.64 Trillion
Commercial Banks 44%
Savings Institutions 7%
Life Insurance Companies 23% Savings Institutions 19% GSEs 1% Other 17% Agency- and GSE- Backed Mortgage Pools 3%
CMBS
Other 11%
<1%
$5.9 Billion
CMBS
21%
$552.8 Billion
Source: Flow of Funds Accounts of the United States, Board of Governors of the Federal Reserve System.
Transaction Timing
Lockout Period: Neither defeasance nor prepayment is permitted prior to the earlier of three years after loan origination or two years after loan securitization. Notice Period: Loan documents will require notice to the loan servicer 30 to 60 days before the intended defeasance date. The borrower may be required to submit nonrefundable processing fees at the time of this notice. Open Period: At some interval beginning one to six months prior to the maturity date of the loan, prepayment is permitted and defeasance is not required.
Parties Involved
Borrower
& Borrowers Counsel
Master Servicer
& Servicers Counsel
Independent Accountant Securities Broker/Dealer Securities Intermediary (Custodian) Special Servicer Rating Agencies Trustee
Typical Timeline
T-30+ Business Days T-30 Business Days T-30 to T-10 Business Days New Transaction (Sale or Refinance) Exists Which Will Require Defeasance of Current Mortgage Loan Borrower Gives Servicer Notice of Intent to Defease
Initial Conference Call; Requirements Checklists and Draft Defeasance Documents Distributed; Due Diligence Commences; if applicable, Rating Agency Packages Distributed Revised Documents Distributed; Due Diligence Finalized; if applicable, Rating Agency and Special Servicer Approval Received
Typical Timeline
T-5 to T-2 Business Days Defeasance Documents Executed and Returned to Servicers Counsel; Release Documents Executed by Servicer to be Sent to Title Company to Hold in Escrow All Defeasance Documents in Physical Possession of Servicers Counsel; All Defeasance Requirements Satisfied; Refinance or Sale Transaction Closed on Paper; Securities Purchased Accountant Prepares Final Verification Report; Final Escrow Instructions Circulated; Final Settlement Statement Circulated; Refinance or Sale Transaction Funds Into Escrow Securities Delivered to Securities Intermediary; Title Company Wires Funds to Settle Purchase of Securities to Securities Intermediary
Settlement
Securities Proceeds
Escrow Account
Loan Payment
Securities Proceeds
Balloon Payment
Substitute Collateral
Noncallable U.S. Treasury obligations or, in some cases, Agency securities obligations of Fannie Mae or Freddie Mac. Will be held by the Custodian / Securities Intermediary in an escrow account. Coupon payments and payments at maturity of these securities will be used to make the remaining loan payments, including the balloon payment. If the interest rate on the loan exceeds the yield provided by the securities in the defeasance portfolio, the securities will cost more to purchase than the outstanding principal balance of the loan. This difference is referred to as the defeasance premium.