Defeasance is the mechanism by which a borrower retires a securitized (CMBS) commercial mortgage before maturity: rather than prepaying cash, the borrower purchases a portfolio of U.S. government or agency securities whose cash flows replicate every remaining loan payment, substitutes that portfolio as collateral, and obtains a release of the lien on the real estate. The loan itself remains outstanding in the trust — assumed by a successor borrower — because REMIC tax rules restrict outright prepayment; defeasance is generally permitted beginning two years after securitization.
Defeasance is the exit ramp for performing CMBS loans; its cost — the price of the substitute securities — rises when Treasury yields sit below the note rate, which can lock borrowers in place. Loans that cannot support a defeasance or refinance at maturity migrate instead to the special servicer, where resolutions include modification, foreclosure, or a note sale.
Why credits like this reach a workout desk: bank noncurrent commercial real-estate loans have risen while reserve coverage slips at community banks (FDIC Quarterly Banking Profile), and roughly $957 billion of commercial and multifamily mortgage debt was scheduled to mature in 2025 — against a total market of about $4.8–5.0 trillion, ~38% of it held by banks and thrifts (Mortgage Bankers Association). See the CRE distress statistics hub for the full figures and sources.
Primary sources: FDIC Quarterly Banking Profile, Mortgage Bankers Association, and interagency (FDIC / OCC / Federal Reserve) guidance on CRE loan accommodations and workouts. Figures are directional and updated periodically; confirm the latest release before relying on a specific number.
Yield maintenance is a cash prepayment plus a premium compensating the lender for lost yield; defeasance is collateral substitution with no prepayment at all. CMBS documents typically mandate defeasance because it preserves the trust's cash flows for bondholders.
Approximately the market price of the securities portfolio plus transaction costs for consultants, counsel, rating agencies, and the successor borrower. When Treasury yields are below the note rate the portfolio costs more than the loan balance; when they are above it, defeasance can cost less than par.
It transfers to special servicing, where the trust may modify the loan, foreclose, or sell the note; Standing Bid Capital purchases CMBS and bank-held commercial mortgage notes — Request a confidential review.