Final answer:
A lender might agree to a nonrecourse loan if there is a low loan-to-value ratio, reducing the risk to the lender as the collateral value is high in relation to the loan. This provides security as the property can cover the loan in case of default. Other factors might influence the decision, but collateral value is key.
Step-by-step explanation:
A lender might agree to a nonrecourse loan primarily under the circumstance of a low loan-to-value ratio. This situation presents less risk to the lender because the collateral value of the property is high compared to the loan amount. If the borrower defaults, the collateral can be sold to recoup the loan without needing to pursue the borrower for any deficiency. Lenders might also consider other factors such as high creditworthiness of the borrower or a short loan term, but a nonrecourse mortgage is more closely tied to the value of the collateral securing the loan. Nonrecourse loans became a topic of discussion after the subprime mortgage crisis, where lending practices were criticized for leading to high default rates. To mitigate risk, banks that plan to keep the loan as an asset are incentivized to scrutinize borrowers more compared to when they plan on selling the loans as securities. This dynamic can influence a lender's willingness to offer nonrecourse terms, often favoring situations where the likelihood of the borrower's default is minimized, such as when the borrower has a strong financial position or when the property's value securing the loan is stable or expected to appreciate.