Non-recourse Promissory Notes

There is a kind of collateralized promissory note (or mortgage) called a "non-recourse promissory note." In this case, the creditor (the person lending the money) understands that if the borrower stops paying, then all the creditor can do is foreclose; there will be no deficiency judgment against the borrower; the creditor looks solely to the collateral.

With a non-recourse note, then, it is clear that the promise is contingent on whether "things work out." There would be no moral opprobrium attached to a "strategic default."

Given the fact that non-recourse notes are in the market place, the argument is stronger that there is moral opprobrium attached to a strategic default where the promissory note is the more typical recourse note.

Of course, a non-recourse mortgage is very uncommon in the home mortgage context. In such a case, the down payment requirement would be larger and the interest rate higher.

As strategic defaults become more common, then one will see the cost spread between the non-recourse note and the recourse note narrow. That is, the down payment required of a recourse borrower will increase and look more and more like that which would be required of the non-recourse borrower and the interest rate the recourse borrower pays will similarly increase. It will, then, be harder for people to finance a new home. The advantage that the strategic defaulter claims for himself will work to the dis-advantage of all home-buyers. Furthermore, the value of all homes will decrease because fewer people will be able to buy them; and then construction generally will decline and people in that industry lose their jobs. This starts to look like strategic defaulting on a recourse promissory note really is immoral, because the individual advantage is to the detriment of others.