Mortgage Crisis: Blame The Bank?

Banks have played a big role in the mortgage crisis, not only because they issued loans to suspect borrowers, but because many originated and sold bad loans to other lenders, says a University of Michigan business professor. "The model of lending in which the originator of a loan sells it to various third parties, known as the originate-to-distribute model, became a popular vehicle for credit and liquidity risk-management in recent years," said Amiyatosh Purnanandam, assistant professor of finance at U-M's Ross School of Business. "However, banks with aggressive involvement in this market had incentives to issue inferior-quality mortgages. This allowed them to benefit from the origination fees without bearing the credit-risk of the borrowers.