Mortgage Prepayment by Defeasance

George Lefcoe

No 8662, Working Paper from USC Lusk Center for Real Estate

Abstract: To protect against losses when borrowers prepay to take advantage of declining interest rates,banks and insurance companies have come to rely on "yield maintenance" clauses. Theseprovisions require the borrower to make a lump sum payment to cover the lender’s potential lossfrom reinvesting prepaid sums. For reasons described later, yield maintenance provisions haveproved woefully insufficient to compensate the holders of securitized commercial mortgage loanswhen borrowers prepay. Increasingly, mortgage loans originated for sale through commercialmortgage backed securities (CMBS) only allow prepayment through defeasance. Underdefeasance provisions, prepaying borrowers must provide Treasury obligations exactlymatching the cash flow of all scheduled mortgage payments. This article compares the practicalconsequences of yield maintenance to defeasance provisions for commercial borrowers andmortgage bond investors.

Keywords: Mortgage prepayment; CMBS; interest rates; mortgage loans (search for similar items in EconPapers)
Date: 1999
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://lusk.usc.edu/sites/default/files/working_papers/wp_1999_107.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:luk:wpaper:8662

Access Statistics for this paper

More papers in Working Paper from USC Lusk Center for Real Estate Contact information at EDIRC.
Bibliographic data for series maintained by Chris Steins ().