The basic facts about the financial crisis that originated in the home mortgage market are not in dispute: The housing bubble that preceded the financial crisis was reinforced by an excessive liberalization of mortgage lending terms that produced toxic mortgages -- these were mortgages that could not be repaid unless house prices continued their rapid rise. Each player involved in the process was able to pass on the risks associated with these mortgages to the next player in the process -- until it ended up with the investor purchasing the security that was issued against the mortgages. Among all the parties involved in the process, the investor typically was the least capable of controlling or assessing the risk. Policy remedies designed to prevent it from happening again have focused mainly on the loan origination process. The logic is simple: Prevent the origination of toxic mortgages and we prevent future crises. This logic underlies the drastic tightening of underwritin...
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