Loan Defeasance Once Again On the Rise

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WASHINGTON, DC-Offering more evidence of normalizing markets five years after the capital markets collapse, defeasance is back as a going concern. Trepp data show $10.1 billion worth of loans were defeased through Nov. 30; the Commercial Real Estate Finance Council says this is a 140% jump over the same period a year ago.

Writing in the most recent issue of CREFC’s CRE Finance World, Christina Zausner, the association’s VP of industry & policy analysis, quotes Morgan Stanley’s Richard Hill on the cause of the uptick in volume of loan defeasance. “Defeasance was a bigger strategy prior to the downturn,” Hill, head of CMBS and CRE debt research at Morgan Stanley, told Zausner. “As financings increasingly become available and markets continue to normalize, you would expect to see more defeasance, especially as loans mature in greater numbers.”

Zausner explains that “a CMBS loan often includes a requirement that allows prepayment only if the borrower pledges high-quality securities—in the form of zero-coupon Treasury bonds—in place of the loan.” In short, defeasance is a substitution of collateral and an assignment of debt. The strategy, she notes, once again is being favored by borrowers.