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Answer: A recourse loan is better for the borrower because it means that the borrower can seek a so-called short sale if the value of the house is less than the outstanding principal balance on the mortgage loan
The false statement is **B**. A **recourse loan** is generally worse for the borrower, not better, because the lender can pursue the borrower for any deficiency after foreclosure. A short sale is not what makes a recourse loan advantageous to the borrower. Statements **A** and **C** are true. Statement **D** is also consistent with the default process in mortgage-backed securities, where the guarantor/pool seeks recovery from the collateral and any available remedies after compensating investors.
Author: Manit Arora
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Question-509.3. In regard to mortgages and mortgage-backed securities, each of the following is true EXCEPT which is false?
A
In a mortgage pass-through, the cash flows from the underlying mortgages (i.e., interest, scheduled principal, and prepayments) are passed from the borrowers to the investors
B
A recourse loan is better for the borrower because it means that the borrower can seek a so-called short sale if the value of the house is less than the outstanding principal balance on the mortgage loan
C
Mortgage servicers manage the flow of cash from borrowers to investors in exchange for a fee taken from those cash flows; mortgage guarantors guarantee investors the payment of interest and principal against borrower defaults, also in exchange for a fee
D
When a borrower does default, the guarantor compensates the pool with a lump-sum payment and then, through the servicer, pursues the borrower and the underlying property to recover as much of the amount paid as possible
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