Yield maintenance, defeasance, and step-down

Investopedia describes yield maintenance as a prepayment fee that lets the lender earn the yield it expected. Investopedia describes defeasance as a substitution of collateral, typically securities, so the debt is still paid. Wikipedia's defeasance article is the same idea in plainer legal language: the lien on the property is released because other collateral now secures the payments. A step-down penalty is simpler. It is a percentage of the balance that gets smaller each year, then often hits zero. People shop loans as if these were three prices of the same thing. They are three different jobs.

The Federal Reserve's H.15 release is selected interest rates, including Treasury constant maturities. Yield-maintenance formulas and defeasance portfolios use those Treasury yields as the comparison or the discount. When Treasury yields fall relative to the loan coupon, the cost of getting out often rises, because the lender's remaining yield is harder to replace. When Treasury yields rise, the cost can shrink. This page does not print an H.15 yield and does not print a coupon. Any arithmetic you care about belongs in the estimator, with numbers you type. The result is illustrative. It is not a payoff letter.

Where each one usually shows up

Life-company loans often use yield maintenance. Conduit loans often use defeasance, yield maintenance, or a period of lockout followed by one of those. Agency apartment loans have their own prepay schedules, set by the agency lender, not by this page. Bank loans more often use a step-down, a fixed penalty for a few years, or no penalty after a short window. More often is not always. Your note says which one you signed. A borrower who may sell soon should read that section before celebrating a long maturity.

Open the prepayment estimator and keep the calculations separate. Do not add a defeasance estimate to a step-down as if they were one fee. Conduit context is Arizona CMBS. Life-company context is life company loans. How a fixed coupon differs from a floating one, still without a quote, is fixed versus floating. Selling subject to the existing debt, when the documents allow it, is assumable mortgages. Words are in the glossary.

An illustration that is not a quote

Imagine a loan with years left and a prepay clause that points at Treasury yields. You still need the remaining balance, the remaining term, the coupon in your note, and the Treasury maturity the formula names. Change any one of them and the fee changes. That is the whole lesson. We will not fill in sample percentages, because a sample is what people screenshot and treat as a rate.

Capital Market Funds is not a Fannie Mae DUS lender. The office is 7373 E Doubletree Ranch Rd #255, Scottsdale, AZ 85258. The phone is (480) 495-8072. Capital Market Funds, LLC - CBK-2007014 - Commercial Mortgage Banker and NMLS 1445066. The servicer's payoff, not this essay, is the number you wire.