How did information asymmetries in the home mortgage market contribute to the financial crisis of 2007-2009?

Question

What will be an ideal response?

Answer 1

In several ways:
1. Mortgage lenders-the originators -eased standards and reduced screening to increase the volume of lending and the short-term profitability of their businesses. The result was many risky mortgages: When housing prices began to fall in 2006, defaults soared.
2. The firms that assembled these mortgages into securities for sale-the distributors -did little to forestall the decline of lending standards by originators.
3. Rating agencies might have halted the game early. Instead, they awarded their top ratings to a large share of mortgage-backed securities, severely underestimating the riskiness of the loans. In retrospect, we can now see that the agencies had little incentive to expend the resources necessary to adequately screen the underlying loans or the lenders.
4. Finally, many investors (and government officials responsible for overseeing intermediaries) assumed they could rely on other people-they were free riders. Rather than undertake their own costly screening efforts, they assumed the assessment of the rating agencies was accurate.