can someone pls help me understand this call protection? i dont really understand after reading the book… thanks
Defeasance occurs when prepayment loan proceeds received by the loan servicer are invested in U.S. Treasury securities so it increases the quality of a CMBS loan pool. When the defeasance period ends, the U.S. Treasuries are liquidated and the proceeds are used to repay the mortgage. The collateral provided by the U.S. Treasuries is of higher quality than the underlying asset; therefore, defeasance represents the greatest level of prepayment protection for an investor. No distributions are made when the defeasance takes place, so there is no issue concerning how prepayment penalties will be disbursed. The cash flow from the defeasance funds is substituted for payments made by the borrower. Basically if prepayment occurs, don’t pay the investor just invest the money in treasuries and pay investors later