With ________, the borrower provides sufficient funds for the servicer to invest in a portfolio of Treasury securities that replicates the cash flows that would exist in the absence of prepayments.

Question

Quizplus · Accepted Answer

Defeasance is a process in which the borrower provides sufficient funds (usually from the proceeds of the sale of the property) for the servicer to invest in a portfolio of Treasury securities that replicates the cash flows that would exist in the absence of prepayments. This essentially eliminates the prepayment risk for the lender and allows the borrower to pay off the loan early without incurring any prepayment penalty points or yield maintenance charges. Prepayment lockout is a provision in the loan agreement that prohibits the borrower from prepaying the loan for a specified period of time, and prepayment penalty points and yield maintenance charges are fees that are imposed on the borrower for prepaying the loan.

With ________, the Borrower Provides Sufficient Funds for the Servicer