- Recourse is a legal term that refers to the ability of a creditor to pursue a debtor for payment in the event of default.
- In the context of securitisation, recourse refers to the ability of investors in a securitisation to pursue the originator or sponsor of the securitisation for payment in the event of default on the underlying assets.
There are two types of recourse in securitisation:
- Full recourse: This means that investors in a securitisation have the right to pursue the originator or sponsor of the securitisation for payment in the event of default on the underlying assets.
- Limited recourse: This means that investors in a securitisation have a limited right to pursue the originator or sponsor of the securitisation for payment in the event of default on the underlying assets.
The type of recourse that is used in a securitisation will depend on a number of factors, including the type of underlying assets, the credit quality of the borrowers, and the risk appetite of the investors.
Here are some examples of how recourse is used in securitisation:
- Mortgage-backed securities: Mortgage-backed securities typically have limited recourse. This is because the underlying assets are mortgages, which are considered to be relatively low-risk.
- Collateralized debt obligations: Collateralized debt obligations (CDOs) can have either full recourse or limited recourse. The type of recourse that is used will depend on the type of underlying assets and the risk appetite of the investors.
Recourse is an important consideration for investors in securitisation. Investors need to understand the type of recourse that is available to them in the event of default on the underlying assets.