Defeasance
Asset-Backed Securities glossary · Asset Specific Nuances
Definition
Prepayment method in CMBS where borrower substitutes Treasury securities whose cash flows replicate remaining loan payments.
Defeasance in plain English
Imagine you took out a big loan to buy a shopping mall, and you want to sell the mall early — but the lender doesn't want to lose the steady stream of payments they were counting on. Defeasance is the workaround: instead of paying off the loan, you buy a bundle of super-safe U.S. government bonds (Treasuries) that spit out exactly the same payments, on exactly the same dates, as your remaining loan would have. You hand that bundle to the lender, so they keep getting paid on schedule from the bonds instead of from you, and you walk away free to sell the property. It's essentially swapping in a guaranteed replacement paycheck so nobody notices you left.
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