标题: Use of defeasance? [打印本页] 作者: bigredhockey55 时间: 2011-7-11 19:30 标题: Use of defeasance?
In a defeasance, if a borrower makes a relevant payment to the lender to invest in a portfolio of Treasury securities, and generate cash flows to investors... what benefit does this serve?
Reducing prepayment risk and decreasing credit risk (since Treasuries are default-free securities)?作者: ningning1984 时间: 2011-7-11 19:30
been sometime since I read / reviewed this..
isn't it something related to "external credit enhancements" on Commercial MBS?
CP作者: Rasec 时间: 2011-7-11 19:30
yea i know this is a form of prepayment penalty but i also never understand the purpose, as the lender can just take the money from the borrower and do as he pleases with it..what is the point of having the borrower put it into T-bills when the lender can do it himself---he's getting the money back one way or another so not seeing how its a prepayment penalty作者: chaojimali 时间: 2011-7-11 19:30
The amt you need to supply for a defeasance is the principle + Interest portion discounted at the t-bill rate. if you were to pay off a loan without a prepay penalty it would just be the principle you would need to pay off.
stating this another way:
To repay a loan without a prepay penatly = principle on loan
To repay a loan with a defeasance prepay penalty = principle + int that would have accrued under normal payment/1+t-bill rate作者: needhelp1700 时间: 2011-7-11 19:30
ninja youre right. i remember this now. the question then is, why would the borrower prepay? this seems like the most punitive type of prepayment penalty and it seems like he is in every case better off not prepaying so that he can make only principal payments.
i guess there may be certain exceptions, for exmaple needing to get your debt ratio down for reg capital/rating purposes.作者: yalo 时间: 2011-7-11 19:30
Defeasance gives a higher quality asset to the loan servicer than the underlying asset (real estate, etc) with no credit risk of U.S. Treasury securities.
Correct me if I am wrong.作者: Otabek 时间: 2011-7-11 19:30
Defeasance is a type of call protection for CMBS securities.
There are several advantages to this, first as eighty said, because you're investing in treasury securities you are increasing the credit of the pool of mortgages.
Second, unlike the other call protection provisions, there is no distribution made to the bondholders when defeasance takes place. So, since there are no penalties, there is no issue as to how any penalties paid by the borrower are to be distributed amongst the bondholders in the CMBS structure.作者: jacksparrow 时间: 2011-7-11 19:30
How is defeasance call protection?
I think it is credit risk enahnceent , not call protection.
Call protection would be in the indenture to the securities , setting some minimum time before the issuer can make pre-payments .
Defeasance is default related risk mitigation作者: bdavi77962 时间: 2011-7-11 19:30
It seems clear now that the use of defeasance is the strongest form of prepayment prepayment protection because it is the only one (out of prepayment lockout, defeasance, prepayment penalty points, and yield maintenance charges) that does not result in any payment being made to the CMBS tranches.
