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Prepayment options for fixed rate loans include defeasance, declining fixed percentages and two yield
maintenance options. For adjustable rate mortgages, a 1% and a declining fixed percentage schedule are available.
Under defeasance, rather than prepaying the mortgage, the borrower obtains a release of the lien on
the property by purchasing a single Fannie Mae bond with cash flows identical to those of the mortgage and then pledging the
bond as substitute collateral for the loan.
Because Fannie Mae defeasance can be accomplished with the purchase of a single bond, it can be mush
easier and less costly for the borrower than defeasance accomplished by purchasing a series of Treasury or other government
securities.
Defeasance is available for fixed-rate loans with terms of 10.5 years or less, including cash loans
in MBS or REMICs. A loan may not be defeased during the first three years from origination or within the first two years after
being added to a REMIC.
Yield maintenance is a prepayment premium that allows the investor to attain the same yield as if the
borrower had made all scheduled payments until the end of the specified Yield Maintaiience period. Yield maintenance premiums
are designed to make investors indifferent to prepayment by the borrower.
The Yield maintenance prepayment premium is calculated as the greater of: a) 1% of the unpaid principle
between the mortgage note rate and the yield on a reference Treasury security designed in the loan document. The present value,
discounted bt the yield on the reference Treasury, is calculated to the end of the Yield maintenance period rather than to
maturity.
Prepayments made after the expiration of the Yield maintenance period, but before 3 months prior to
loan maturity, are subject to a prepayment premium equal to 1% of the unpaid principle balance. No prepayment premium is charged
during the 3 months prior to loan maturity.
Yield maintenance can be used in conjunction with any fixed –rate loan in a cash MBS execution.
Yield maintenance is not used in conjunction with adjustable rare loans.
Fixed percentage prepayment options for fixed rate loans are based on a declining schedule that starts
at 5% and declines, over the term of the loan, to 1% This option is priced 10 basis points higher than Yield Maintenance or
the Extend Maturity Product.
For adjustable rate loans, a borrower can choose between a declining schedule (with a 1% minimum) and
a fixed 1% prepayment option. The 1% prepayment option is priced 10 basis points higher than the declining option, allowing
prepayment flexibility at a nominal cost. | 
