medium · Asset-Backed Securities asset-nuances
A CMBS IO (Interest-Only) investor is analyzing a pool where a significant loan ($50 million) has just been 'Defeased.'
What is the primary impact of this event on the IO cash flows?
- The IO cash flows on that loan terminate immediately, since defeasance is treated as a prepayment at par.
- The IO coupon on that loan actually increases, because the risk profile of the collateral has improved to Treasury quality.
- The IO cash flows continue unchanged, as the loan remains in the pool at the same coupon, now backed by Treasuries.
- The IO value declines, since the chance of collecting a future yield maintenance penalty is now eliminated for that specific loan.
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