A way to free a property from a loan before maturity by swapping the collateral: the borrower pledges securities that make the remaining payments, and the lien on the property is released.
Defeasance does not pay the loan off. The note stays in place and keeps paying its investors on schedule; what changes is the collateral. The borrower buys securities whose payments cover the remaining loan payments, pledges them, and the property is released to be sold or refinanced.
Fannie Mae’s servicing guide lays out the steps for its loans. A borrower may defease only if the loan documents permit it, and only during the defeasance period before maturity. The servicer sends a defeasance notice, and closing falls 30 to 45 days after the servicer receives it. The borrower delivers a pledge agreement giving a perfected security interest in the substitute collateral, assigns the note with that collateral to a successor entity, and pays the next scheduled payment, other sums due and the servicer’s costs, including its legal fees. On compliance the property is released from the lien and the note is secured by the substitute collateral.
The cost moves with interest rates, since it is the price of the securities, and the legal work adds to it. Ask before closing whether your loan uses defeasance, yield maintenance or a fixed schedule.
How it shows up in the data here
Not shown on this site. No public file used here records whether a loan permits defeasance. It is a feature of securitized and some agency loans, so the nearest view is who makes those loans: loan comps for multifamily lists lenders by multifamily loans made. A bank or credit union that keeps the loan on its own books sets its own payoff terms, so ask each lender how its loan may be paid off early.
Go further
- Multifamily loan comps: Multifamily loans made, with median reported rate and term by lender.
- Multifamily lenders: Lenders by multifamily loans held and made, by state.
- Multifamily loan checklist for 5+ unit properties: A larger apartment loan can go to five kinds of lender. They want much the same package. They differ on recourse, term, prepayment, speed and what they ask of the sponsor.
Related terms
- Prepayment penalty: A charge a loan agreement sets for paying off some or all of the principal before a stated date. Common forms are a step-down schedule, yield maintenance and defeasance.
- Yield maintenance: A prepayment charge sized so the lender or investor earns about what it would have earned had the loan run to the end of the yield maintenance period.
- CMBS conduit loan: A commercial property loan made to be pooled with other loans and sold to investors as commercial mortgage-backed securities, not kept by the lender that made it.
- Agency lender: A lender authorized to make apartment loans that Fannie Mae or Freddie Mac then buys or backs, under those companies' rules instead of the lender's own.
- Fixed rate loan: A loan whose interest rate is set at closing and does not change for a stated period, often the whole term, so the principal and interest payment stays the same.
- Permanent loan: A longer-term loan on a finished, leased property that replaces the construction or bridge loan and is repaid from the property's income.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.