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Recourse Loan and Non-Recourse Loan

Recourse loans or recourse debts are the debts that are not backed by collaterals from the borrowers. In this type of loans the lenders are allowed to collect the debtors assets in case of defaults by the debtors. This is used as an alternative to the foreclosure of property with home loan or auto loan. Non-payment of these debts allows the lender to pursue legal course of action or collect assets of the owner.

Recourse loans can be either limited or full recourse debts. Full recourse debts gives rights to the lenders enabling them to seize and sell all the assets acquired from the borrower. The lender can even sell the assets acquired through original loan. Partial or limited recourse loans are constrained only to the original loan contract. The lender can take action only on the assets or properties that are named in the original loan contract.

Non recourse loans or non recourse debts are loans that are secured. The loans are made secured loans with the help of pledge of collateral. This pledge is done with the help of real property for which the borrower is not liable personally. The issuer or lender can seize the property but recovery of the lender is limited and constrained only to the collateral.

Since real estate property prices have dropped and under the circumstances if the property seized is not sufficient enough to cover the debt or outstanding loan balance, then difference between the collateral value and value of the loan is considered as the loss for the lender. So normally loss for the lender is only limited to 50%-60% of the loan to value ratios. This enables the property to provide over collateralization to the loan.

Non recourse loans main aim is to make lenders to overwrite the loans. This is because most of the time lenders are at liability as they are in the first loss position as compared to borrowers.

The main differences between non recourse and recourse loans lies with the rights of the lender. When a borrower fails to clear all the debts the way lender goes and deals with the borrower and his properties forms the major difference in both the loans. In both the loans the lender have the right to seize the properties that are used as security or collateral in order to obtain loans.

The conflict arises only when money is still owed by the borrower after the sale of collateral property. Recourse mortgage enables the lender to seize all the other assets of the borrower to clear off the debts or go to the extent of suing the person’s wages getting garnished. Non recourse mortgage doesn’t allow the lender to go to this extent. Once the sale of property is done he cannot act any further. The lender just absorbs the difference and walks away.

So people may find non recourse loans are safe and secure. This is true but one should also realize that they come at high interest rates.

Tags: collateral, interest rates, Legal, loan, money, mortgage, price

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