FINANCIAL CRISIS, HOME MORTGAGES, CREDIT MARKETS, FINANCIAL Case Study - 1

FINANCIAL CRISIS, HOME MORTGAGES, CREDIT MARKETS, FINANCIAL INSTITUTIONS, MORAL HAZARD, ADVERSE SELECTIONS, - Case Study Example Securitization can be considered as a disruptive innovation as it drove the world economy into an all-time debauched predicament whose shattering effects are still felt to-date in America and the world over (Driffill, 2013). Securitization is a financial engineering practice where financial institutions create a pool of assets, including mortgages and loans, and resell the repackaged assets to investors who takes responsibility of the assets thereafter (Bertaut & National Bureau of Economic Research, 2011). The mushrooming of securitization saw the emergence of asset-backed security (ABS) as a common type of mortgage-backed security (MBS) and a structured investment vehicle (SIVs) which become a driving force in the financial crisis by empowering banking institutions to possess superfluous capital which could be given out as loans to prospective homeowners without clear ascertainment of their credit worthiness (Glaeser,  E.  L., & Sinai, 2013; Farmer, 2010). Eric (2010) asserts that MBS was flavored by apportioning between agency MBS, and non-agency MBS. The agency MBS were insured by the government thus resulting to no real credit risk to the investors a factor that made it effective for many organizations to offer mortgage loans to mortgage loan seekers who later painfully defaulted the loans (Manoj, 2010). Apparently, securitization endorsed the disintegration of risks. Investors and mortgage seekers could gravitate towards investments or transactions that best met their reward or risk preferences. This was consequentially backed by securitization which transformed the mortgage market to a lascivious condition. It transferred possession of mortgages from lenders to investment banks and non-bank financial institutions (Batten & Szilagyi, 2011). Noteworthy, the mortgage owners were well acquainted with information pertaining to their borrowers default probability, but securitization bestowed the obligation of offering loans on investment banks