Recourse Loan Defined
A Recourse Loan or recourse debt is a loan agreement that allows the lender to seize and sell the borrower’s assets (beyond the collateral identified in the agreement) if the borrower fails to pay the liability and the value of the underlying assets are not enough to cover the balance.
A Little More on What is a Recourse Loan
In a recourse loan, the borrower is personally liable to repay the debt amount, and, if he or she fails, the lender has the right to garnish wages or levy account for collecting the owed amount.
A recourse loan term provides more power to the lender and allows the lender to go after the other assets of the borrower which were not used as the collateral on the occasion of default.
For example, if someone takes a recourse loan of $400,000 for buying a property. Then after a year, the owner goes into foreclosure and the lender finds out the present value of the property is $250,000. In this case, the lender can seize the other assets of the borrower in order to cover the outstanding balance.
The lender is allowed to draw funds from the borrower’s financial accounts both savings and checking. They can also garnish the borrower’s wages to collect what is owed by the borrower.
A non-recourse loan term doesn’t allow the lender to go after any assets other than the collateral.
There are two types of recourse loan terms, full recourse, and limited recourse.
- Full Recourse Loan – In full recourse agreement, the lender can pursue any and all assets of the borrower until the whole amount of the debt is covered.
- Limited recourse loan agreement mentions which assets can be pursued by lenders on the occasion of default. The lender cannot go after all assets if the debtor fails to repay the loan, they can only pursue those assets which are listed on the agreement.
Agreements for “hard money loans” for real estate often contain recourse loan terms. Consumers with limited or poor credit history are often forced go for hard money loans as other institutions do not approve their loan application. The interest rate of hard money loan is often higher than the rates offered by banks. The lender gives money to these debtors on the conditions of a recourse loan. Consumers with poor credit history usually take out such loans for buying properties. The lender agrees to approve a loan to such a debtor with a guarantee of having access to the borrower’s other assets in case of default.
References for Recourse Loan
Academic Research on Recourse Loan
Residential mobility decisions in Japan: effects of housing equity constraints and income shocks under the recourse loan system, Seko, M., Sumita, K., & Naoi, M. (2012). The Journal of Real Estate Finance and Economics, 45(1), 63-87. This study uses six waves of Japanese household longitudinal data to estimate a conditional fixed effects logit model to evaluate the impacts of housing constraints and income shocks on own-to-own residential moves in Japan. The study also investigates whether the effects are different between positive and negative equity moves.
A contingent claim pricing model for valuing non-recourse loan programs and target prices, Turvey, C. G., Brorsen, B. W., & Baker, T. G. (1988). (No. 270319). American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). This article explains a methodology and methods through which agricultural stabilization and insurance policies can be assessed. It suggests the evaluation of stabilization policies through probability models. It also discusses the price and revenue insurance and provides the models for their valuation. The article uses an option-based pricing model for computing price and revenue insurance premiums.
Residential mobility decision in Japan: Identifying the effects of housing equity constraints and income shocks under the recourse loan system, Seko, M., Sumita, K., & Naoi, M. (2009). Keio Economic Society Discussion Paper Series, (09-3), 1-24. This paper investigates whether housing equity constraints affect owner-to-owner residential mobility and if the government policies purposed to address this constraint have a timely effect on residential moves.
Non-recourse loan unlocks Japan’s renewables, Lee, A. (2013). International Financial Law Review. This article explains that a lack of limited-recourse in Japan has halted foreign investors from taking advantage of the country’s beneficial feed-in tariff regime for renewable energy. This is because non-recourse financing is rare in Japan although Japanese banks are willing to finance on a non-recourse basis overseas.
Recourse and Non-recourse Debt: Differences in Loan Forgiveness, Harl, N. E. (2016). Agricultural Law Digest, 27(15), 1. This paper examines the concerns being raised about loan forgiveness with the farm commodity prices receding from the abnormally high prices of 2012 and 2013. It also explores an aspect of loan forgiveness that is complicated to most people, and it involves the difference in treatment between recourse-and non-recourse loans.
Rare non-recourse loan boosts Japanese renewables, Lee, A. (2013). International Financial Law Review. This article investigates the lack of recourse financing in Japan. Most Japanese projects are mostly financed through corporate loans. In Japan, it is hard to find banks that are willing to fund projects on a limited recourse basis despite the domestic banks being significant players in the global project finance deals.
Negotiating Carveouts to Non-recourse Loan Documents (with Form), Wharton, J. G. (1997). Prac. Real Est. Law., 13, 47. This study explains that sometime back carveouts to non-recourse loans were very few. These loans used to require the lender to look to the property solely pledged as collateral and to all income and profits arising without any right of recovery.
Credit risk valuation model for real estate non-recourse loan, Yamanaka, S., & Otaka, M. (2014). JSIAM Letters, 6, 49-52. This paper suggests a practical, cost-effective model to estimate the credit risk of a substantial portfolio of real estate non-recourse loans. This model utilizes information that is easy to get and also update such as real estate investment indices. It also takes into account the empirical characteristics of real estates.
Limited recourse loan plans: timing and market value substitution issues, James Meli, C. T. A. This study majors on the interaction between the general CGT rules and the specific share buy-back-rules. It emphasizes on the buy-back specific market value substitution rule and the relevant taxing point. It also analyzes the share buy-back rules where the shares increase in value over the vesting period but fail to vest and are bought-back at the original subscription price.
Leverage and House-price Dynamics Under the Recourse–Loan System in Japanese Prefecures, Seko, M., Konno, K., & Sumita, K. (2010). The paper uses Japanese Preferectual-level data to analyze the relationship existing between borrowing patterns and house price dynamics under the recourse-loan system. The main finding suggests that in prefectures where highly leveraged homeowners are common, the house prices react less to prefecture-specific shocks.
Sample Nonrecourse Loan Carveout and Springing Recourse Provisions with Borrow Comments, Hulse, B. D., Christophorou, P. L., & Guida, P. A. (2016). Prac. Law. 62, 49. A majority of the loan documents provide that the loan is usually nonrecourse to the borrower and guarantor except for certain carveouts for which the borrower and guarantor are liable for resulting losses to the lender and certain actions that cause the borrower and guarantor to become fully responsible for the whole loan on a recourse basis.