Defeasance Clause

A defeasance clause is a mortgage provision indicating that the borrower will be given the title to the property once all mortgage payment terms are met.

Defeasance clauses are based on the concept of defeasance which nullifies a deed or contract. Generally a defeasance clause is not needed or required in most states. Overall it can basically be used to summarize the final procedures in a mortgage loan contract with a real estate property as secured collateral.

Ultimately, defeasance occurs when a borrower completes all of the mortgage payments on their loan. Secured mortgage loan contracts have detailed procedures for the management of collateral rights throughout the loan and at its defeasance.

A borrower approved for a secured mortgage loan must agree to the mortgage contract terms which include assignment of the collateral rights. In a secured mortgage loan, two documents are important for the lender in securing the collateral. The first document is a property lien which is used in most mortgage loans. The property lien is the document that gives the lender the right to seize the secured collateral. The property lien must be perfected by being recorded with the appropriate state agency. With a property lien a lender can easily receive approval from the courts to notify a borrower of the intention to seize property if a default has occurred.

In a mortgage loan a lender also maintains ownership of the property throughout the loan through documentation on the title. When the secured mortgage loan is approved and closed the ownership of the secured collateral is transferred to the lender which must be documented and recorded on the title.

Defeasance occurs when the mortgage has been paid and all of the terms of the loan have been met. When a borrower pays all of their payments and reaches the end of their loan, the title ownership is then transferred to the borrower by the lender. Generally a defeasance clause is not needed since this is the standard procedure for loan expiration however in some cases defeasance clauses may detail the final processes for title transfer and loan maturity.

In some situations defeasance clauses may also be used for transferring alternative collateral. Specifically a borrower could include a defeasance clause if they plan to accumulate alternative assets that they would like to replace for the real estate collateral at some point during the loan. This type of defeasance clause could allow the borrower to obtain title ownership prior to the expiration of the loan by exchanging alternative collateral for the secured real estate property collateral. Alternative collateral potentially available for use in this situation could include investment securities, money market accounts or other investment assets.