Final answer:
Mortgage bankers can face risks from issuing subprime loans, which can lead to economic downturns such as the 2008-2009 Great Recession. To mitigate risks, banks should maintain high underwriting standards, diversify their portfolios, ensure adequate capital reserves, and closely monitor loans and market conditions.
Step-by-step explanation:
Mortgage bankers face significant risks in their business operations, particularly when it comes to the securitization of mortgage loans. When banks hold onto mortgage loans as assets, they are incentivized to assess borrowers' creditworthiness vigilantly to ensure repayment. In contrast, when loans are intended to be sold, there may be less rigorous scrutiny, leading to the issuance of subprime loans.
These loans often feature low down payments and minimal evaluation of a borrower's stable income, with initial low payments that eventually surge. Such loans, especially prevalent in the mid-2000s, were termed NINJA loans, as they were issued to individuals with No Income, No Job, or Assets, exemplifying high risk. The consequences of these practices were starkly showcased by the 2008-2009 Great Recession, when the decline in banks' asset values led to a credit crunch impacting essential economic sectors.
To mitigate these risks, mortgage bankers should adhere to strict underwriting standards, even if they plan to sell the loans. They should also diversify their loan portfolios to spread risk and maintain adequate capital reserves to absorb potential losses. Ongoing monitoring of loan performance and market conditions can also aid in risk management.