In the case of securitizations, the contractual agreement that securities whose servicing falters within the first few months can be returned to the special purpose entity or the originator. As a result, – buyers of securitized paper are less likely to scrutinize the credit quality of tranches taken into the portfolio: moral hazard, – the special purpose vehicle or originator has to draw on all credit lines because the original loans become uncollectible as a result of the borrower’s insolvency, as in the course of the subprime crisis in 2007, which can again – lead to rising interest rates on the financial market as well as to strong risk aversion. – See assets, illiquid, asset-backed securities-collateralized debt obligation, credit default swaps, loan-versus-paper business, development process, iterative, herd behavior, capital management company, credit card fiasco, collateral crisis, originate-to-distribute strategy, pay-green initiative, price changes, concurrent reintermediation, risk profile, setback effect, single master liquidity conduit, structured investment vehicle, true sale securitization, submarine effect, securitization, securitization structure, waterfall principle, special purpose vehicle.
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
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