Explanation:
Nonrecourse debt is a type of loan secured by collateral, which is usually a property. If the borrower defaults, the issuer can seize the collateral but cannot seek further compensation from the borrower, even if the collateral does not cover the full value of the defaulted amount.
In the lead-up to the financial crisis of 2007-2008, many nonrecourse mortgages allowed the lender only to take possession of the borrower’s home. When the housing prices fell, the borrowers sold their homes to the lender for the principal outstanding on the mortgage because the collateral did not cover the full value of the defaulted amount.
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Q.92 Which of the following best defines a nonrecourse loan?
A
A type of loan secured by collateral in which the issuer can seize the collateral but cannot seek from the borrower for any further compensation if the borrower defaults.
B
A type of unsecured loan in which the issuer cannot seek out the borrower for any compensation if the borrower defaults.
C
A type of loan secured by collateral, usually a property, in which the issuer can only seek further compensation in the event the collateral does not cover the full value of the defaulted amount.
D
A type of unsecured loan in which the borrower pays a very low initial interest rate that increases after a few years.
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