Dont quite understand the concept behind defesance in CMBS (call-level protection). So if let’s say the borrower insist to make payment, the servicer put these money to treasury… but obviously the treasury rate is (say 3%) less than the mortgage rate (say 9%)… so does that mean the investor are forced to receive less return from the investment? BUT i thought defesance is a “call protection” meaning investors are protected from the level of return. Not sure what this is about. Any insights?
the securities are not called… instead the payments are reinvested in order to compensate for the difference in yield there might be another provision that obligates at a penalty - difference between bond yield and treasury yield that is my understanding
Because of this, credit quality increase correct?
i would assume yes the prepayment risk is less…