How does defeasance work?
As described in our overview: Defeasance is the process through which a borrower is released from the obligations associated with its debt through the purchase of a portfolio of high quality bonds. This portfolio both serves as replacement collateral to secure the debt and generates the cash flows required to meet the future obligations of the debt. The loan’s Servicer typically requires that a Successor Borrower take the place of the original Borrower. The original Borrower purchases sufficient collateral to service all remaining payments of principal and interest. The REMIC Trust places a lien on this collateral which replaces the lien against the borrower’s property, thus allowing the property to be released. Once the Successor Borrower takes the place of the Borrower, the original Borrower is released from its financial obligations under the loan. The collateral is a portfolio of bonds that generates cash flows (coupon payments and maturing bonds) that match the loan obligations as
