| Summary: | Securitization is considered as one of the most important financial development in recent history. It offer the benefits of improving returns on capital, lowering borrowing
costs, diversifying risks, increasing secondary market liquidity and increasing availability of credit for mortgage borrowers.
However, many parties blamed the moral hazards in the securitization of mortgage loans as the key factor contributing to the recent US financial crisis of 2007 - 2008. To investigate the claim, we used the case studies of securitization of mortgage loans in US as our base and compare it with the experience of Malaysia.
Premised on the literature review findings and the results of the case studies, we find supports that securitization of mortgage loans did create moral hazards and could not
find evidence that proves otherwise.
We conclude that securitization of mortgage loans did create moral hazards. However, the level of moral hazards experienced by the US and Malaysia differ. The differences were attributed to, amongst others, the strength of the underwriting standards, the complexities of securities and the strength of regulations in the two countries. We also conclude that the present of moral hazards did not preclude the fact that securitization provides benefits to the players and the economy, particularly when developed in the context of well-aligned incentives and oversight.
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