Financial Risk Manager Part 1
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Which of the following options best describes the conditions under which a non-recourse mortgage operates?
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A
The borrower is given flexible repayment terms, including variable interest rates and a grace period.
B
If the borrower defaults, the lender can take possession of the assets used as collateral as well as other assets of the borrower.
C
If the borrower defaults, the lender can only take possession of the assets used as collateral and not any other assets of the borrower.
D
The borrower can only sell the assets used as collateral with express authority from the lender.
Explanation:
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
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