Question

There were many causes that contributed to the financial crisis of 2007–2008. Which of the choices most accurately describes the role of securitization in contributing to the crisis? Globalization has increased the connectedness of the major economies of the world. Correspondingly, there has been a decrease in the economic security of the U.S., where the U.S. has been adversely affected by the many European nations that have suffered recessions. In providing aid to firms that were at risk of becoming insolvent, the U.S. government securitized these firms. In the future, firms are more now likely to engage in risky investments since the government securitizes these behaviors. Banks bundled mortgages together and then sold them on the market as a financial asset. However, the risk level of these securitized assets was often much higher than the purchaser thought. Banks failed to securitize their loans by requiring sufficient down payments from home buyers. This resulted in small declines in housing prices causing many homes to go into foreclosure.

Answer 1

Answer:

Banks bundled mortgages together and then sold them on the market as a financial asset. However, the risk level of these securitized assets was often much higher than the purchaser thought.

Explanation:

Securitization is a financial term that refers to the practice of bundling up various types of debt (for example, mortgages, auto loans, credit card debt, etc) into one single package, that is sold to a third party under a new financial structure (new terms of payment of both capital and interest).

The problem with this type of practice is that sometimes it groups together varios types of debt with different levels of risk that the third party does not assimilate or understand well.

Securization was one of the leading causes of the financial crisis of 2008-2009, as the question explains.