How does securitization fraud impact the risk assessment of mortgage-backed securities?

Securitization fraud distorts the risk assessment of mortgage-backed securities by misrepresenting the credit quality and performance of underlying loans. Investors rely on accurate information to evaluate the risk-return profile of these securities, but fraudulent practices such as inflating asset values or concealing loan defects can lead to mispricing and misallocation of capital. Consequently, investors may underestimate the true risks associated with mortgage-backed securities affected by securitization fraud, resulting in financial losses and systemic instability. This underscores the importance of robust risk assessment methodologies and due diligence practices in the mortgage market.