Which to choose? Yield Maintenance or Defeasance? - Posted by DougO_NM

Posted by Rob F. on August 18, 2003 at 09:46:38:

In order to make an educated choice there are other items that need to be determined.

  1. Loan Amount
  2. Defeasance Collateral type
  3. Yield Maint. language.
  4. And amortization (fully or balloon)

Typically defeasance will be cheaper and you do have the potential to defease at a discount. But there are certain situations where ym will be better.

Which to choose? Yield Maintenance or Defeasance? - Posted by DougO_NM

Posted by DougO_NM on June 28, 2003 at 14:06:31:

When a loan application is discussing prepayment, how do you decide between Defeasance Prepayment or Yield Maintenance Prepayment? The Defeasance Option lets the borrower substitute collateral with US Government Securities after 2 years in an amount sufficient to make the remaining payments. Yield Maintenance says that if you choose this option the rate floor and spread will increase 15 basis points and that after 3 years the borrower can pre pay the greater of “yield maintenance” and 1% of outstanding balance.

I’m deciding whether to lock up a loan for 20 years or 10 years. The only bug I see in the 20 year term is the possibility of increased property values within the next 10 years, and trying to figure out what the “penalty” would be if we decided we wanted to refi.

Any thoughts would be greatly appreciated.


Yield Maintenance or Defeasance? - Posted by Eric C

Posted by Eric C on July 03, 2003 at 12:35:28:

Hi Doug -

This isn’t an “either/or” choice, is it? And do they define US securities (most likely t-bills) specifically?

Reason I ask – I’ve had some luck in the past creating mortgages through local banks (and other institutions) that passed the GSE’s critieria for underwriting, etc (might not be that hard these days for Freddie Mac, eh?)

Point being, once these things are blessed, they are highly liquid and command both a premium price and instant respect. (I used to swap these to banks for their REOS and bad paper – worked like a charm).

I would also think that some variation might work down the line for you. Maybe.

I need to think about it - talk to you later, OK?

See you,

Eric C

PS - Got more info?