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FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities

Which feature distinguishes a non-recourse mortgage from a recourse mortgage?

In a non-recourse mortgage the lender's claim is limited to the pledged property; if sale proceeds fall short, the borrower is not liable for the deficiency. This gives the borrower a default option similar to a put, unlike a recourse loan.

  1. AThe lender can pursue the borrower's other assets for any shortfall after foreclosure
  2. BThe lender's claim is limited to the collateral property, so the borrower can effectively walk away from the loanCorrect
  3. CThe interest rate must be floating
  4. DThe loan must be insured by the government

Explanation

With non-recourse loans, the lender can only seize the property on default and cannot claim other borrower assets for a deficiency. This gives the borrower an embedded put-like default option. The first option describes a recourse loan.

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