English
Without Recourse
wi-THOWT REE-kohrs
A phrase used in financial transactions to indicate that the seller or endorser of a financial instrument, such as a promissory note or a check, is not liable if the instrument is not paid or honored. In other words, the buyer or subsequent holder assumes the risk of non-payment or default.
The investor purchased the mortgage-backed securities without recourse, meaning they would bear the risk of any defaults on the underlying mortgages
Real Case Example:
In the financial crisis of 2008, many banks and financial institutions sold mortgage-backed securities (MBS) to investors. These MBS were often sold "without recourse," meaning that if the underlying mortgages defaulted, the investor (buyer of the MBS) bore the risk of loss, not the original lender (seller of the MBS).
This practice contributed to the severity of the financial crisis because it incentivized lenders to issue risky loans, knowing they could offload the risk onto investors. When the housing market collapsed and many borrowers defaulted on their mortgages, investors holding the "without recourse" MBS suffered significant losses.