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

Which feature most clearly distinguishes a nonrecourse mortgage, as common in many U.S. states, from a recourse mortgage?

In a nonrecourse mortgage, the lender can claim only the collateral property if the borrower defaults and cannot pursue the borrower's other assets. This gives the borrower an implicit option to hand over the house instead of repaying, unlike a recourse loan where personal assets are also exposed.

  1. AThe lender can pursue only the collateral property if the borrower defaultsCorrect
  2. BThe interest rate is always floating
  3. CThe borrower must make a balloon payment at maturity
  4. DThe loan must be insured by a government agency

Explanation

In a nonrecourse mortgage the lender's claim is limited to the property securing the loan, giving the borrower an implicit put option on the house. Recourse loans let the lender also pursue the borrower's other assets. The other options describe unrelated features.

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