Concentrated position - Nonrecourse loan - Put option

CFA Level III
#1

Mortgage financing can be an attractive strategy to raise funds without loss of control of the property. With a nonrecourse loan the lender’s only recourse is to seize the property if the loan is not paid. The borrower effectively has a put option on the property. If the property value falls below the loan amount, the borrower can default on the loan, keep the loan proceeds, and “put” the property to the lender.

Question: In real world, will dafault the nonrecouse loan trigger other issue? For example, legal or future credit issue…

Or, it’s just as simple as put option?

#2

Can i check whether the put option is available as an advantage to the lender or borrower?

CFAI text says: [content removed by moderator]

#3

Your credit score would go to *hit for one and no one in their right mind would loan you money for a while.

#4

sounds like the put option is both an advantage and disadvantage to the borrower…

Then, if we run into a question on this concept, should we list this as an advantage or disadvantage?

#5

In CFA curriculum future credit score after executing this “put option” is not even mentioned. Therefore, for the exam purpose, IMO, this is an advantage. In fact, LTV ratio by a financial institution side (as “haircut”) may contain a possibility of execution of such option. Therefore, comparing to other available strategies and personal objectives mortgage financing should be evaluated depending on facts in question.

#6

Good to know! Thanks, Flashback!

#7

Do me a favor and Google an article by CNBC called “Full Recourse Loans Won’t Save Canada’s Housing Market.” I think you will find it interesting, especially halfway through and at the end of the read. Just showing how things play out in the real world.