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Financial Crisis and Securitization

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Securitization of mortgages enabled various dimensions of risks embedded in pools of mortgages to be distributed to investors with varying degrees of tolerance for credit and interest rate risk and with differing expectations about the future path of economic valuables. Before securitization, the bank that originated a pool of mortgages tended to be the financier of these loans until the loan was paid off. This meant that all of the risks embedded in the mortgage pool remained on the balance sheets of the originating bank. This was the mainstream financing technique was. True or false and why?

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Solution Summary

This solution explains if the mortgage securitization question is true or false and explains why.

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TRUE

The main point of securitization is to get the assets in a group and off the balance sheet of the originator. Remember Enron's collapse in 2001? They used the same principles of securitization. By using Special Purpose Entities, they pooled ...

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