Reference no: EM132656161

Question 1. Define the following terms used in or related to the reading:

a. moral hazard

b. skin in the game

c. securitization

d. originate-to-distribute model of lending

e. mortgage-backed securities

f. subprime mortgage

g. Alt-A mortgage

h. lemon discount

i. tranches

Question 2. How does the originate-to-distribute model of lending differ from traditional lending? Which lending approach results in lenders having less concern about the riskiness of the loans they are making? Why?

Question 3. What evidence suggests to James that originate-to-distribute mortgage lenders relaxed lending standards and were less diligent in screening loan applicants? Why was this behavior especially profitable for loans that were to be securitized?

Question 4. What roles do originators, sponsors, and servicers play in the securitization process?

a. Who performs these roles in affiliated deals, mixed deals, and unaffiliated deals?

b. In which types of deal is moral hazard likely to be most and least severe? Why?

c. Do the evidence James presents confirm this hypothesis? In other words, does skin in the game matter? Explain.

Question 5. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires sponsors of mortgage-backed securities to retain at least 5% of the credit risk associated with the underlying mortgage loans. Does James believe that this requirement will be adequate to substantially reduce the moral hazard problems inherent in the originate-to-distribute lending model? Why?