Nonrecourse debt or a nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable.
If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the difference between the value of the collateral and the loan value becomes a loss for the lender.
Thus, non-recourse debt is typically limited to 50% or 60% loan-to-value ratios, so that the property itself provides "overcollateralization" of the loan. The purpose of non-recourse debt is to require lenders to underwrite their loans on a sustainable and prudent basis since the lender is in the first-loss position with these loans, not the borrower.
How Non-Recourse Debt Can Be Safe and Recourse Debt Can Be Dangerous Leverage does not have to be dangerous. Non-recourse debt on an asset can serve to make a large purchase more affordable. Taking out a non-recourse loan on an already owned asset can actually reduce risk, since the borrowed funds become yours, while the risk of loss is transferred to the lender.
But recourse debt is something else entirely. If you purchase some investments, and then borrow with recourse debt to buy more, you are now vulnerable to mark to market losses in what you own. Depending on the precise terms of the debt, a decline in the value of your holdings could force you either to put up more collateral--which you may not have--or to sell off some of the investments you purportedly like to meet margin calls.
By borrowing, you have ceased to be the master of your own fate and allowed the lender--or actually the market--to be.
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