What is full recourse debt?
Full recourse debt is a type of secured debt which gives the lender the right to assets—Beyond the guaranteed collateral specified in the loan agreement — to cover full repayment of the borrower’s loan obligations in the event of default on the loan.
In other words, loans with full recourse provisions provide lenders with additional recourse to pursue 100% of the outstanding loan amount, including legal action.
Key points to remember
- Full and non-recourse debts are examples of secured loans.
- Full recourse debt is common in the mortgage industry.
- Full recourse debt gives the lender the right to foreclose on assets beyond the specified collateral in the event the borrower defaults on the loan.
When a borrower enters into a secured contract ready contract, the terms of the contract may be full or non-recourse. The terms of a full recourse loan give the lender rights to more assets than just the collateral specified in the contract.
Understanding full recourse debt
Full recourse loans are common in mortgages
Full recourse loan provisions are common in loan agreements that use real estate (i.e. mortgages) warranty. For example, if a borrower were to default on their mortgage, then that lender would want to seize and foreclose the property.
However, if the resale value of the property does not cover the full amount owed to the lender, then provided the loan agreement contains a full remedy clause, the full remedy rights would come into effect. Thus, mortgage bankers generally add full recourse clauses to their loan contracts to guard against the risk of the collateral value falling.
Full recourse rights protect the lender
A full recourse provision grants the lender the right to seize any additional assets that the borrower may own and use them to recover the remaining amount owed to them. Depending on the terms of the full recourse loan, lenders could gain the authority to operate a borrower’s bank accounts, investment accounts and salaries.
There is a difference between full debt and non-recourse debt
Full recourse and non-recourse debts are associated with secured loans. The essential difference between a loan with recourse and without recourse has to do with the types of assets that a lender can claim if a borrower does not repay a loan.
For the lender, full recourse debt is virtually risk free.
Debt without recourse
Unlike full recourse debt, debt without recourse does not give the lender any right to additional assets if a borrower defaults on a secured loan. In a non-recourse mortgage loan, the lender would have no right to any assets beyond the real estate guarantee.
Thus, non-recourse debt presents some collateral risk for the lender, as there is a possibility that the collateral value may fall below the borrower’s repayment value. However, as a mortgage loan progresses, the collateral risk will decrease for the lender as more of the loan will be repaid.
The fact that the value of the collateral may decrease is usually a significant risk factor in the subscription process. This risk is one of the reasons why lenders generally have a loan to value ratio threshold for the amount of principal they will issue to a secured borrower. According to Experian, most lenders typically require a loan-to-value ratio of no more than 80%. Higher ratios can be approved, but will generally require Primary Mortgage Insurance (PMI).