What does a Defeasance Clause allow when a borrower defaults?

What does a Defeasance Clause allow when a borrower defaults?

• A. If a borrower defaults, the lender may take the property without foreclosure
• B. The borrower may sue the lender for damages
• C. The loan term automatically converts to a fixed rate
• D. The lien is removed from the property

Answer: (A)

A defeasance clause is about removing the mortgage lien on a property by substituting collateral or paying off the loan with qualified securities so that the loan is “defeated.” When defeasance occurs, the lender’s security interest in the property is released, and the title can be free of that mortgage. This mechanism lets a borrower refinance or sell while keeping the debt obligations satisfied with new collateral or funds. It’s not about the lender taking the property automatically merely because of default; default triggers the lender’s standard remedies (like acceleration and foreclosure) unless a defeasance arrangement is used to substitute collateral and remove the lien.

A defeasance clause is about removing the mortgage lien on a property by substituting collateral or paying off the loan with qualified securities so that the loan is “defeated.” When defeasance occurs, the lender’s security interest in the property is released, and the title can be free of that mortgage. This mechanism lets a borrower refinance or sell while keeping the debt obligations satisfied with new collateral or funds. It’s not about the lender taking the property automatically merely because of default; default triggers the lender’s standard remedies (like acceleration and foreclosure) unless a defeasance arrangement is used to substitute collateral and remove the lien.