What are repossession and foreclosure?

The act of taking possession of property by the owner of the asset or a creditor with a security interest in that asset upon termination of or debtor default on the agreement that granted the other party the right to possess and use the asset is repossession.  Taking repossession of an asset without judicial assistance is self-help repossession, it being a unilateral act by the lessor not supported by any legal process or permits.  Although self-help repossession is permitted in many jurisdictions, it must be conducted in a way that it does not breach the peace or violate some other law.

Repossession for a lessor is generally easier than foreclosure of a security interest by a lender because of the lessor’s legal ownership of the asset.  Legal title to leased assets effectively secures the lessors’ ownership of the assets and enables lessors to control the property and realize proceeds from their disposition.  Without the ability of lessors to repossess their assets upon default on leases, leasing would be much the same as other forms of secured finance.

Leasing is an important means of financing for retail customers and SMEs and has low default and loss-given-default rates.  Empirical evidence shows that lower-rated cash-constrained firms have the greater tendency to and lease their operational assets and that the high recoverability of leased assets compensates for poor credit ratings.  The repossession advantage of leasing enables lessors to extend more credit against assets to less creditworthy customers than lenders can and to leverage the lower credit risk of leasing.

Recovery through asset sales is often very high and lessors generally have a firm understanding of the assets and the secondary markets of the assets they lease.  Taking possession of assets that go off-lease and maximizing the return through their sale in secondary markets is a normal activity in leasing operations and is not limited to defaulted transactions.