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CFA Level I · CFA Level I Exam · Fixed-Income Securitization

In a jurisdiction where residential mortgages are non-recourse, a borrower defaults on a loan with an outstanding balance of 300,000 secured by a property that the lender sells for 240,000 after costs. The lender's most likely recourse regarding the 60,000 shortfall is to:

With a non-recourse mortgage, the lender can look only to the mortgaged property. Once the property is sold for 240,000, the 60,000 shortfall is the lender's loss, and it cannot claim the borrower's other assets or income, which a recourse loan would permit.

  1. Apursue the borrower's other assets and income for the shortfall
  2. Bbear the loss because it can claim only the propertyCorrect
  3. Crequire the borrower to refinance the shortfall into a new loan

Explanation

Under a non-recourse loan the lender's claim is limited to the collateral property. After selling it for 240,000 the lender absorbs the 60,000 shortfall. Pursuing other assets would be possible only under a recourse loan.

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