When a loan is sold and the seller must buy it back under certain conditions, what is this process called?

The correct answer is that the process in which a loan is sold and the seller must repurchase it under certain conditions is known as recourse. This arrangement is particularly common in the context of mortgage loans. In a recourse agreement, if a borrower defaults on the loan, the lender has the ability to pursue the original lender or seller for recovery of the funds. This means that the seller of the loan retains a financial obligation to buy back the loan if certain specified conditions, such as defaults or breaches of contract, occur.

Recourse loans contrast with non-recourse loans, where the lender's only remedy in the event of default is to foreclose on the property and not pursue further payment from the borrower or original seller. Therefore, recourse serves as a protection for lenders, allowing them to mitigate their risk by holding the original lender accountable under specific conditions.

Understanding recourse is crucial for those involved in the mortgage industry, particularly in structuring transactions that involve the sale and management of loans. This concept helps to define the liabilities of lenders and the security mechanisms in place to safeguard against potential losses.