What is Yield Maintenance?
Yield Maintenance is more directly concerned with the contemporary market situation. Yield Maintenance allows the borrower to prepay without harming the lenders expectations of income from interest. The penalty for prepayment is the present value of the remaining payments, multiplied by the percentage difference between the interest rate on the loan and the current yield from treasury bills with the same maturity.
A. Yield Maintenance is more directly concerned with the contemporary market situation. Yield Maintenance allows the borrower to prepay without lowering the lender’s expectations of interest income. The “penalty” for prepayment is the value of the remaining payments multiplied by the percentage difference between the interest rate on the loan and the current yield from treasury bills with the same maturity.
Yield maintenance is a form of prepayment fee or premium that is calculated on the movement of interest rates during the period of time that the security or securities in question are held. The borrower is assessed the yield maintenance by the lender. Generally, the anticipation if that the security will provide a higher yield as a result. Perhaps the best illustration of how yield maintenance works is in the market of commercial mortgage. The institution that underwrites the mortgage will base the rate of the yield maintenance on both current interest rates as well as projected rates that may apply during the course of the life of the mortgage. The formula for determining the applicable yield maintenance involves considering the current or present value of outstanding payments associated with the mortgage. This figure is multiplied by the difference between the current rates for Treasury notes of the same duration, and the bond interest rate involved with the mortgage. The value to th
Yield Maintenance is a prepayment penalty that allows a lender to attain the same yield on a loan as if the borrower had made all scheduled mortgage payments until maturity in the event the borrower pays off the loan before maturity. Yield maintenance premiums are designed to make lenders whole in the event of an early prepayment by a borrower. What type of loan requires Yield Maintenance? Generally speaking, fixed rate loans are the loans that require yield maintenance or its proxy, defeasance. These types of loans are often pooled with other loans and then securitized, meaning that there has been an issuance of a new publicly traded financial instrument, such as bonds, which are secured by the pooled assets. This process allows these loans to often provide more aggressive terms than traditional portfolio loans. These loans are popular due to favorable fixed interest rates, longer amortization, higher leverage/less required equity, and limited personal liability. In exchange for these
What is defeasance? Why do some loans have defeasance and some have yield maintenance? Which is better if I have a choice? Yield Maintenance is the prepayment penalty used today by most agency Lenders (those who represent Fannie Mae and/or Freddie Mac Multifamily Lending). Yield Maintenance is a specific formula and is quantifiable. In concept, it is the loss of income the debt holder will receive on a present value basis. Yield Maintenance was the original way in which fixed rate prepayment penalties were calculated. In the late mid-late 1990’s, the conduits changed that.
