The Real Estate Encyclopedia
Defeasance Clause
Category - Real Estate Glossary - Real Estate Terminology

A clause in a mortgage that gives the mortgagor the right to redeem his or her property upon the payment of the mortgagor's obligations to the mortgagee. Defeasance is a substitution of collateral. It is not a simple prepayment but a 30-45 day process that usually is coordinated with a sale or refinance. Typically, the borrower uses proceeds from the sale or refinance to purchase a portfolio of U.S. government securities that is sufficient to make all of the remaining debt service payments. The securities are pledged to the lender, and the lender releases the real estate from the lien of the mortgage. The note, which remains outstanding, and the portfolio of securities are assigned by the borrower to a successor borrower who makes the ongoing debt service payments. Nearly every fixed-rate conduit/CMBS loan originated since 1998 requires the borrower to defease a loan before selling or refinancing. Note that REMIC regulations prohibit defeasance during the first two years from the date the loan is securitized (not the date the loan was closed).

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