Defeasance describes the process in which a borrower is legally released from debt obligations by a lender as the terms of the agreement are properly fulfilled.

This odd but not uncommon situation can arise when a borrower wants to be released from a debt by making full repayment but the lender refuses to allow is as it would negatively affect their projected cash flow and profits from that particular deal.

So the borrower or a new entity buys a portfolio of treasury bonds that is capable of generating the returns comparable to the returns of the mortgage should it not be repaid.

In this case, the bonds are usually held by a securities intermediary and the income is paid to account servicing to keep up with the debt obligations.

The property is no longer the security with the portfolio of financial assets taking it’s place.

A defeasance clause contained in a contract stops a lender from foreclosing a property as long as there is no breach of contract.

Saying this, a lender can still refuse to accept such proposals if they choose to play hardball.

But since their bottom line is not negatively affected, there is no pragmatic reason not to allow defeasance.

These events are more common in commercial properties than residential dwellings.