What Is Full-Recourse Debt?
Full-recourse debt is a type of secured debt that gives the lender rights to assets—beyond just the secured collateral specified in the loan contract—to cover full repayment of the borrower’s loan obligations if they default on the loan. In other words, loans with full-recourse provisions assure lenders that they will be 100% repaid.
For the lender, full-recourse debt is practically risk-free.
When a borrower enters into a secured loan contract, the terms of the contract may be either full- or non-recourse. The provisions of a full-recourse loan give the lender rights to more assets than just the secured collateral specified in the contract.
A Deeper Look at Full-Recourse Debt
Full-recourse debt mitigates any degree of risk for the lender. A lender may choose to integrate a full-recourse clause into the loan agreement if he believes that a secured asset likely will decrease.
Full-Recourse Loans are Common in Mortgages
Full-recourse loan provisions are common in loan agreements that use a real estate property, i.e., mortgages, as collateral. For example, if a borrower were to default on his or her mortgage loan, then that lender would want to seize the property and foreclose. However, if the property's resale value does not cover the entire amount due to the lender, then—providing the loan contract had a full-recourse provision—full-recourse rights would kick in. So, mortgage bankers generally add full-recourse clauses to their loan agreements to protect themselves from the risk of a drop in collateral value.
Full-Recourse Rights Protect the Lender
A full-resource provision grants the lender the right to seize any additional assets that the borrower may own, and use them to recoup the remaining amount due to him. Depending on the terms of the full-resource loan, lenders could gain the authority to tap a borrower’s bank accounts, investment accounts, and wages.
The Difference Between Full- and Non-Recourse Debt
Full recourse and non-recourse debt are associated with secured loans. The essential difference between a recourse and non-recourse loan has to do with the types of assets a lender can claim if a borrower fails to repay a loan.
- Full- and non-recourse debt are examples of secured loans.
- Full-recourse debt is common in the mortgage loan sector.
- Full-recourse debt gives the lender the right to seize assets beyond the specified collateral in case the borrower defaults on the loan.
In contrast to full-resource debt, non-recourse debt does not give a lender any rights to additional assets if a borrower defaults on a secured loan. In a non-recourse mortgage loan, the lender would not have rights to any assets beyond the real estate collateral. Thus, non-resource debt presents some collateral risk for the lender, as there is a chance that the collateral value could fall below a borrower’s repayment value. However, as a mortgage loan progresses the collateral risk will decrease for the lender because greater portions of the loan will be paid off.
That the collateral value may decrease is usually an important risk consideration in the underwriting process. This risk is one reason that lenders typically have a loan-to-value ratio threshold for the amount of principal that they will issue to a secured borrower. Most lenders usually will grant a loan for approximately 70% of the value of a borrower’s secured collateral.