What is Yield Maintenance?
Yield maintenance is a prepayment provision common in commercial real estate loans. If the borrower prepays, they must pay a penalty equal to the present value of the difference between the note rate and the replacement Treasury rate for the remaining term. This makes the lender economically whole; they receive what they would have earned if the loan had not prepaid. Yield maintenance effectively eliminates the borrower's refinancing incentive because the penalty captures all the rate savings. Other forms of CRE call protection include lockouts (no prepayment allowed), defeasance (substituting Treasury collateral), and step-down penalties.
How LoanBook Uses Yield Maintenance
LoanBook's CRE Payoff Model projects no payoff while yield maintenance, defeasance or a lockout is in force. After protection ends, the payoff rate depends on loan age and the refinance incentive, from observed SBA 504 first-lien payoff experience, and a fixed-rate loan is priced to the month its probability of still being outstanding falls to 50%, capped at balloon or maturity.
Frequently Asked Questions
What is the difference between yield maintenance and defeasance?
Yield maintenance is a cash penalty; the borrower pays the lender directly. Defeasance requires the borrower to purchase Treasury securities that replicate the remaining loan cashflows, substituting government collateral for the real estate. Both achieve the same economic result (protecting the lender) but defeasance releases the real estate from the lien.
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