Can you explain the process of securitization and how it can be vulnerable to fraudulent activity in mortgage lending?
Can you explain the process of securitization and how it can be vulnerable to fraudulent activity in mortgage lending?
Securitization involves bundling individual loans, such as mortgages, into a pool, and then issuing securities backed by the cash flows from that pool. This process allows lenders to offload risk and raise capital by selling these securities to investors. However, it can be vulnerable to fraud. Mortgage originators may misrepresent the quality of loans or inflate borrower qualifications to increase their marketability. Moreover, inadequate due diligence or flawed documentation can lead to the inclusion of risky or fraudulent loans in the securitized pool, potentially harming investors.
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