Financial Risk Manager Part 2
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A credit manager, well-versed in the lessons learned from the US subprime mortgage crisis of 2007-2009, is overseeing the structured credit portfolio for a financial institution. Their objective is to identify potential issues related to communication frictions among the different stakeholders involved in the securitization process. What is the correct pairing of a potential friction within the securitization process along with an appropriate strategy to mitigate that friction?
A
Friction between the asset manager and the investor: Adverse selection problem. This problem can be mitigated by the asset manager charging due diligence fees to the investor.
B
Friction between the arranger and the originator: Model error problem. This problem can be mitigated by the arranger providing a credit enhancement to the securitized products with its own funding.
C
Friction between the investor and credit rating agencies: Principal-agent conflict. This problem can be mitigated by requiring credit rating agencies to be paid by originators and not by investors for their rating services.
D
Friction between the servicer and the mortgagor: Moral hazard problem. This problem can be mitigated by requiring the mortgagor to escrow funds for insurance and tax payments.