SUPREME COURT OF THE STATE OF NEW ... - New York Times

purchased loans from originators and securitized the loans. These Agency securitizations had
high credit quality because the Agencies required the underlying loans to be originated in
accordance with strict underwriting guidelines.
90. In the 2000s, the volume of non-Agency mortgage securitizations skyrocketed,
led by the Wall Street investment banks. Mortgage loan securitization shifted the traditional
“originate to hold” model to an “originate to distribute” model, in which originators sold the
mortgages and transferred credit risk to investors through the issuance and sale of RMBS. Under
the new model, the economic incentives are radically shifted because the originators no longer
hold the mortgage loans to maturity. Instead, by selling the mortgages to investors, the
originators obtain the funds to make more loans. Securitization also enables originators to earn
most of their income from transaction and loan-servicing fees, rather than from the spread
between interest rates paid on deposits and interest rates received on mortgage loans, as in the
traditional model.
91. Thus, securitization gives originators an incentive to increase the number of
mortgages they issue and reduces their incentive to ensure the mortgages’ credit quality. As the
SPSI found: “When lenders kept on their books the loans they issued, the creditworthiness of
those loans determined whether the lender would turn a profit. Once lenders began to sell or
securitize most of the loans, volume and speed, as opposed to creditworthiness, became the keys
to a profitable securitization business.” (SPSI Report, at 4.) Nevertheless, contractual terms and
good business practices obligate originators to underwrite loans in accordance with their stated
policies, obtain accurate information from borrowers to enable them to assess the credit quality
of the loans, and obtain accurate appraisals of the mortgaged properties.
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