A loan guarantee, in finance, is a promise by one party (the guarantor) to assume the debt obligation of a borrower if that borrower defaults. A guarantee can be limited or unlimited, making the guarantor liable for only a portion or all of the debt.
Guarantor mortgages are popular with young borrowers who do not have a large deposit saved and need to borrow 100% of the property value to purchase a property. Generally, their parents will provide a guarantee to the lender to cover any shortfall in the event of default.
Government loan guarantees
The term can be used to refer to a government to assume a private debt obligation if the borrower defaults. Most loan guarantee programs are established to correct perceived market failures by which small borrowers, regardless of creditworthiness, lack access to the credit resources available to large borrowers.
Loan guarantees can also be extended to large borrowers for political reasons. For example, Chrysler Corporation, one of the "big three" US automobile manufacturers, obtained a loan guarantee in 1979 amid its near-collapse, and lobbying by labor interests. Somewhat differently, despite intensive lobbying by the Israel lobby, President George H. W. Bush refused $10 billion in loan guarantees to the Israeli government of Yitzhak Shamir because of his pro-settlement policy and because Palestinians and many Arab governments viewed the prior acceptance of loan guarantees as an indicator of America's lack of credibility as a mediator.
Bush requested and received a Congressional delay in discussion of the guarantees, and the Madrid Conference of 1991 was later convened. These loan guarantees were issued later, following the election of Itzhak Rabin and his pledge to end Shamir's settlement policy and reformulate national priorities.
Government programs and agencies
- Fannie Mae
- Export-Import Bank
- Federal Family Education Loan Program
- Freddie Mac
- Government National Mortgage Association
- Small Business Administration
- VA loan
- USAID Development Credit Authority
- U.S. Department of Agriculture (USDA) Farm Service Agency (FSA) loans
- Riding, Alan L. "On the Care and Nurture of Loan Guarantee Programs." Financing Growth in Canada. Paul J. N. Halpern, ed. University of Calgary Press, 1997.
- Scott Lasensky, Underwriting Peace in the Middle East: U.S. Foreign Policy and the Limits of Economic Inducements, Middle East Review of International Affairs: Volume 6, No. 1 - March 2002