What is Without Recourse?

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"Without recourse" means that one party cannot obtain a judgment against, or reimbursement from, a defaulting or opposing party in a financial transaction. When the buyer of a promissory note or other negotiable instrument enters into a "no recourse" agreement, they assume the risk of default.

Definition

Non-recourse means that in a financial transaction, one party cannot sue or claim against the defaulting party. When an acceptor purchases a promissory note or other negotiable instrument, if they enter into a 'non-recourse' agreement, they assume the risk of default.

Origin

The concept of non-recourse originated with the development of financial markets, particularly in the trading of notes and debt instruments. As financial markets became more complex, investors and financial institutions sought more flexible risk management methods, leading to the widespread adoption of such agreements.

Categories and Features

Non-recourse is primarily used in asset securitization and accounts receivable financing. In asset securitization, loans or other assets are packaged into securities sold to investors, who assume the default risk. In accounts receivable financing, companies sell their receivables to financial institutions, which assume the risk of customer non-payment. The advantage of non-recourse is risk transfer, but the downside is potentially higher financing costs.

Case Studies

A typical case is the subprime mortgage securitization during the 2008 financial crisis. Many banks packaged subprime mortgages into securities sold to investors under non-recourse agreements, leading investors to bear significant default risks. Another case involves large corporations selling their receivables to financial institutions to improve cash flow, often using non-recourse agreements, transferring the risk of customer default to the financial institutions.

Common Issues

Common issues investors face with non-recourse agreements include misjudging default risk, which can lead to significant losses. Additionally, many mistakenly believe that non-recourse means no risk, whereas the risk is merely transferred from one party to another.

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