Final answer:
The meaning of 'pay to the order of without recourse' in a mortgage is that the lender cannot seek repayment from the endorser if the borrower defaults, which corresponds to answer 1) A type of mortgage where the lender has no legal recourse if the borrower defaults.
Step-by-step explanation:
The phrase ‘pay to the order of without recourse’, in the context of a mortgage, indicates that the endorser of the instrument (like a promissory note connected to the mortgage) is not assuming liability for payment. In simpler terms, if the borrower defaults on the loan, the lender (or the holder of the note) cannot seek repayment from the endorser. Therefore, the correct answer to the student’s question is 1) A type of mortgage where the lender has no legal recourse if the borrower defaults.
When the endorser uses the phrase ‘without recourse’, they are indicating that, although they are transferring their right to the loan's payments, they are not responsible for the loan’s repayment should the new borrower fail to pay. The endorser is not acting as a cosigner. The risk falls on whoever purchases or holds the note after it has been transferred ‘without recourse.’ Typically, the primary lender would protect themselves by requiring collateral, which is something valuable that the lender can seize and sell if the borrower does not repay the loan.