Financial Risk Manager Part 1

Explanation

A non-recourse mortgage is a type of loan where the lender's ability to claim repayment in the event of a default is limited to the collateral pledged for the loan.

Key Features:

• If the borrower defaults, the lender can only take possession of the assets used as collateral
• The lender cannot pursue the borrower's other assets
• This distinguishes non-recourse loans from recourse loans, where lenders can go after the borrower's other assets if the collateral is insufficient

Risk Implications:

• Less risky for borrowers - personal assets are protected
• More risky for lenders - may not recover full loan amount if collateral value declines
• Therefore, non-recourse loans often come with higher interest rates or more stringent lending criteria

Why other options are incorrect:

• Option A: Incorrect - Non-recourse mortgages typically have fixed interest rates, not flexible terms
• Option B: Incorrect - This describes a recourse loan, not a non-recourse mortgage
• Option D: Incorrect - This relates to restrictions on asset sale, not the fundamental non-recourse feature