How does a defeasance work?
How does a defeasance work?
The defeasance process is a means by which borrowers can get out of a mortgage by substituting a portfolio of U.S. Treasury-backed securities for collateral. In the case of defeasance, the debt obligation does not go away, but the defeasance releases the mortgaged property from the lien against it.
What are defeasance costs?
Defeasance, as its name suggests, is a method for reducing the fees required when a borrower decides to prepay a fixed-rate commercial real estate loan. Instead of paying cash to the lender, the defeasance option allows the borrower to exchange another cash-flowing asset for the original collateral on the loan.
Are defeasance costs deductible?
A defeasance premium paid under a legal defeasance is deductible as a payment of interest in the year incurred.
What is the difference between defeasance and yield maintenance?
Yield maintenance is the actual prepayment of the loan, while defeasance entails a substitution of collateral and a legal assumption of the loan by the successor borrower. A yield maintenance prepayment has two components: the unpaid principal balance of the loan and a prepayment penalty.
Is a prepayment penalty tax deductible?
Prepayment penalties are tax deductible in the State of California and at the federal level, meaning that the penalty could be reduced by half for borrowers in the top tax brackets.
What is a defeased bond?
A defeased security is a bond which, after its issuance, has its outstanding debt collateralized by cash equivalents or risk-free securities. The funds used as collateral are sufficient to meet all payments of principal and interest on the outstanding bonds as they become due.
What is yield maintenance?
Yield maintenance is a sort of prepayment penalty that allows investors to attain the same yield as if the borrower made all scheduled interest payments up until the maturity date.
What is a refunding call?
Refunding occurs when an entity that has issued callable bonds calls those debt securities from the debt holders with the express purpose of reissuing new debt at a lower coupon rate. In essence, the issue of new, lower-interest debt allows the company to prematurely refund the older, higher-interest debt.
When would the defeasance clause in a mortgage take effect?
Defeasance goes into play when a mortgage is paid off in full. When a borrower reaches the end of their loan, the title ownership is then transferred from the borrower to the lender. Generally, a defeasance clause is not needed since this is the standard procedure for loan expiration, although there are exceptions.
What is power of sale clause in a mortgage?
Most deed of trust mortgages include a power-of-sale clause. This clause allows the trustees in deed of trust mortgages to do non-judicial foreclosures on delinquent borrowers – that is, foreclose without going to court.
What is a Defeasible clause?
A defeasance clause is a provision in a mortgage agreement that grants the buyer title (the deed) to property after the terms of the loan have been fully satisfied.
What is a lifting clause?
A provision in a second,third,or other junior mortgage that allows the liens ahead of it to be paid off and refinanced for the same or a lesser amount,without sacrificing their priority in lien positions.
How does a bridge loan work when buying a house?
A “bridge loan” is essentially a short term loan taken out by a borrower against their current property to finance the purchase of a new property. Also known as a swing loan, gap financing, or interim financing, a bridge loan is typically good for a six month period, but can extend up to 12 months.
What are the pros and cons of a bridge loan?
Bridge Loan Pros
- PRO – Avoid Moving Twice.
- PRO – Access equity quickly without selling.
- PRO – Present a stronger purchase offer.
- PRO – Receive bridge loan approval after being denied by banks.
- PRO – Attain a bridge loan against currently listed real estate.
- PRO – Income documentation not required.
- CON –Higher interest rates.
