Mishkin, Frederic

However, as has been the case in previous instances of rapid financial innovations, adequate mechanisms to control excessive risk-taking may not have been in place during the subprime market’s greatest growth.  One innovation, further development of securitized products, gave mortgage lenders greater access to the capital markets and spread risks more broadly.  However, securitization also widened the separation of the originators from the ultimate holders of the loans--that is, those who bought securities backed by loans.  In this setup, a classic principal-agent problem can arise if originators (the agents) do not have a sufficient incentive to shield the owners of the securities (the principals) from suffering higher-than-expected losses.