Fannie Offers 1-Stop Defeasance Option

Fannie Mae has announced that it is now offering borrowers the multifamily market's only "one-stop" defeasance option for fixed-rate mortgages with a term of 10 years or less.Defeasance -- which occurs when a borrower substitutes U.S. Treasury or other qualified securities as collateral for a mortgage loan in return for release of the lien on the borrower's property -- is now being widely used as prepayment protection in the commercial and multifamily mortgage markets, Fannie Mae said. The new defeasance product will use one Fannie Mae debt instrument per defeased loan, and Fannie Mae "will designate an entity to assume the borrower's mortgage obligation after defeasance, thus releasing the borrower's property and releasing the borrower from its obligations under the loan," Fannie Mae said. The government-sponsored enterprise said loans with defeasance "insulate investors in multifamily securities from the uncertainty of having to reinvest their funds in the event of a borrower's prepayment, an uncertainty they would face in a loan with yield maintenance," another prepayment protection option that Fannie Mae said it will continue to offer. "Even small loans can cost-effectively use the defeasance option," said Richard Lawch, Fannie Mae's vice president of multifamily capital markets. "Investors are willing to pay more for securities with a defeasance option than for those featuring yield maintenance, which should result in lower costs to the borrower." Fannie Mae said its product is the lowest-cost defeasance option in the multifamily market. Fannie Mae's website address is http://www.fanniemae.com.