The problem worsened because institutions giving out sub-prime home loans could easily securitise it. Once an institution securitises a loan, it does not remain on the books of the institution.
Hence that institution does not take the risk of the loan going bad. The risk is passed onto the investors who buy the financial securities issued for securitising the home loan.
Another advantage of securitisation, which has now become a disadvantage, is that money keeps coming in.
Once an institution securitises the first lot of home loans and repays the bank it has borrowed from, it can borrow again to give out loans. The bank having been repaid and made its money does not have any inhibitions in lending out money again.
Image: The Citibank logo at a bank branch in San Francisco. | Photograph: Justin Sullivan/Getty Images
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