Defeasance is the substitution of your property with a portfolio of U.S. government securities. During defeasance your mortgage lien is transferred from your property to the securities. The securities portfolio is structured to produce enough cash flow to make all remaining mortgage payments on their due dates. The securities are pledged to the original lender and the lender then releases its mortgage lien. Conduit loan defeasances involve a number of parties, require a number of deliverables. Merrill's staff knows all the players and can help you through a flawless execution.

Your loan documents and your servicer will specify when your loan is eligible for defeasance. Typically the documents will state that you can defease no earlier than (a) four years from the closing date of the loan or (b) two years from the date the loan has been securitized. The two year restriction is a legal requirement for all REMIC trusts. Some loan documents will also require that you give more than 30 days notice prior to a defeasance or will require that defeasance occurs on a certain day of the month. Notice provisions and timing provisions are sometimes negotiable, and Merrill will help you get the best result from your servicer.

The biggest cost in a defeasance transaction involves the purchase of the U.S. government securities that are pledged as collateral for the loan. The price of the securities will depend on market conditions at the time of the defeasance. An optimal portfolio of securities will be structured that closely matches the payments due under the loan. Competitive bids from several broker/dealers will be obtained to ensure that you get competitive pricing and execution. Other transaction costs can run around $55,000 for a typical defeasance, but can be higher depending on the complexity and size of the loan, as well as other factors. Certain fees are standard and pre-determined, such as those for the servicers, securities intermediary, rating agencies and accountants. However, the standard fees vary for different servicers and their counsel. Please use the defeasance calculator or call us to get an estimate of how much it will cost you to defeasance your loan.

The defeasance process typically takes about 30-45 days to complete, but can close more quickly if necessary. Since the funds used to purchase the defeasance securities come from the property refinance or sale, the defeasance will depend on the timing and completion of that sale or refinance. The actual defeasance closing occurs over the span of three consecutive business days, once all servicer and legal requirements have been met.

Direct non-callable obligations of the United States such as Treasuries are acceptable substitute collateral for defeasance. If the loan agreement allows, than other non-callable debt classified as "Government Securities" under Securities act of 1940 can be used. These bonds are issued by Fannie Mae and Freddie Mac. Using these securities may lower your defeasance costs. Merrill will review your loan documents and work with your loan servicer to get you the lowest cost securities for the lowest cost defeasance.

If the borrower authorizes the purchase of the defeasance securities and the defeasance fails to close for whatever reason, the securities will be returned to the broker/dealer, and the borrower will be responsible for any costs incurred by the broker/dealer, including any loss in value of the securities. This risk may be reduced by making sure the sale or refinance documents and all other transactional requirements are satisfied and placed into escrow on Day 1, prior to authorizing the purchase of the defeasance securities. Merrill's defeasance and process experience will make sure all closing steps are completed in a timely fashion.

Both defeasance and yield maintenance are call protection mechanics for the lender. Under yield maintenance, the loan is actually paid off, and the lender receives a lump sum payment of principal and compensation for interest it would have received if the loan continued until maturity. Defeasance is similar in that the borrower is released from the loan and the real property is released from the mortgage. However, in a defeasance, the loan is not extinguished, and the lender continues to receive the same monthly payments as before, except now the loan is secured by a portfolio of government securities instead of the real property, and all of the original borrower's obligations under the loan have been assumed by a successor borrower. Defeasance may offer advantages for the borrower because under certain circumstances you can defease for less than the loan amount. Yield maintenance always costs the loan amount or more.