Defeasance And Your Deal

An Overview of the Mortgage Loan Defeasance Process

Wednesday, October 25, 2006

Langhorne Ambrose Defeasance Management LLC Richmond, Virginia (866) 449-2691

Defeasance is a Substitution of Collateral not a Prepayment of the Related Loan

Balance Sheet Loan Structure

Lender
Loan Payments

Borrower

Mortgage or Deed of Trust Lien

Operating Income

Real Property

CMBS Loan Structure

Bond Payments

REMIC Trustee
Mortgage or Deed of Trust Lien Collections

Bondholders

Servicer
Loan Payments

Borrower

Operating Income

Real Property

CMBS Loan Structure Immediately After Defeasance Transaction

Bond Payments

REMIC Trustee
Collections Lien on Defeasance Portfolio

Bondholders

Servicer

Loan Payments

Borrower or Purchaser
Operating Income

Successor Borrower
Securities Proceeds

Real Property

Defeasance Portfolio

Total Outstanding U.S. Commercial and Multifamily Mortgage Debt

1990
$1.05 Trillion
Commercial Banks 36%

2005
$2.64 Trillion
Commercial Banks 44%

Savings Institutions 7%
Life Insurance Companies 23% Savings Institutions 19% GSEs 1% Other 17% Agency- and GSE- Backed Mortgage Pools 3%

Life Insurance Companies 10%

GSEs 2% Agencyand GSEBacked Mortgage Pools 5%

CMBS

Other 11%

<1%
$5.9 Billion

CMBS

21%
$552.8 Billion

Source: Flow of Funds Accounts of the United States, Board of Governors of the Federal Reserve System.

Annual U.S. CMBS Issuance 1991 to 2005 ($ Billion)

160 140 120 100 80 60 40 20 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Source: Commercial Mortgage Alert

Transaction Timing
Lockout Period: Neither defeasance nor prepayment is permitted prior to the earlier of three years after loan origination or two years after loan securitization. Notice Period: Loan documents will require notice to the loan servicer 30 to 60 days before the intended defeasance date. The borrower may be required to submit nonrefundable processing fees at the time of this notice. Open Period: At some interval beginning one to six months prior to the maturity date of the loan, prepayment is permitted and defeasance is not required.

Parties Involved
Borrower
& Borrowers Counsel

Master Servicer
& Servicers Counsel

Defeasance Consultant Successor Borrower

& Successor Borrowers Counsel

Independent Accountant Securities Broker/Dealer Securities Intermediary (Custodian) Special Servicer Rating Agencies Trustee

Typical Timeline
T-30+ Business Days T-30 Business Days T-30 to T-10 Business Days New Transaction (Sale or Refinance) Exists Which Will Require Defeasance of Current Mortgage Loan Borrower Gives Servicer Notice of Intent to Defease

Initial Conference Call; Requirements Checklists and Draft Defeasance Documents Distributed; Due Diligence Commences; if applicable, Rating Agency Packages Distributed Revised Documents Distributed; Due Diligence Finalized; if applicable, Rating Agency and Special Servicer Approval Received

T-10 to T-5 Business Days

Typical Timeline
T-5 to T-2 Business Days Defeasance Documents Executed and Returned to Servicers Counsel; Release Documents Executed by Servicer to be Sent to Title Company to Hold in Escrow All Defeasance Documents in Physical Possession of Servicers Counsel; All Defeasance Requirements Satisfied; Refinance or Sale Transaction Closed on Paper; Securities Purchased Accountant Prepares Final Verification Report; Final Escrow Instructions Circulated; Final Settlement Statement Circulated; Refinance or Sale Transaction Funds Into Escrow Securities Delivered to Securities Intermediary; Title Company Wires Funds to Settle Purchase of Securities to Securities Intermediary

T-2 Business Days

T-1 Business Day

Settlement

Operation of Escrow Account

TIME Substitute Collateral
Loan Payment

Loan Payment Securities Proceeds

Securities Proceeds

Escrow Account

Loan Payment

Securities Proceeds Loan Payment

Securities Proceeds

Balloon Payment

Substitute Collateral
Noncallable U.S. Treasury obligations or, in some cases, Agency securities obligations of Fannie Mae or Freddie Mac. Will be held by the Custodian / Securities Intermediary in an escrow account. Coupon payments and payments at maturity of these securities will be used to make the remaining loan payments, including the balloon payment. If the interest rate on the loan exceeds the yield provided by the securities in the defeasance portfolio, the securities will cost more to purchase than the outstanding principal balance of the loan. This difference is referred to as the defeasance premium.

Example: Cost of Substitute Collateral

Outstanding principal balance of $1,000,000 60 months to maturity date, 7.25% interest rate, monthly principal and interest payment of $6,822 Remaining payments, including balloon, will total $1,360,106 If all Treasury securities yield 5% i.e., the yield curve is perfectly flat the substitute collateral would be estimated to cost $1,112,000 The defeasance premium is $112,000

Other Transaction Costs

Servicer Processing Servicers Counsel Defeasance Advisor Successor Borrower Accountant Securities Intermediary Rating Agencies Special Servicer $10,000 to $25,000 $12,000 to $25,000 $10,000 to $20,000 $8,000 to $12,000 $3,500 to $10,000 $6,000 to $10,000 $0 to $20,000 $0 to $5,000