One thought on “Revisiting Subprime Crisis – Part I..

  1. An RBI paper quoting Ben Bernanke from his book – The Courage to Act, “With the advent of securitisation, financial institutions dealing in mortgage loans were able to sell their loans to third parties. These loans, often from different parts of the country, were then converted into marketable securities, sliced into segments, which were sometimes rated as safe and sold off to investors. On the other hand, mortgage originators started deviating from the traditional model of raising deposits to make loans and instead started relying more on wholesale short term money to fund mortgage loans. This arrangement seemed to be a win-win situation for everyone involved. Borrowers, even with poor credit histories, could get loans easily; standardisation allowed mortgage firms to service a wider customer base and securitisation allowed them to dispose of these securities to investors which in turn encouraged questionable and sometimes outright unethical lending practices by these firms.”

     

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