Final answer:
The type of funding described is securitization, which involves the pooling of loans into mortgage-backed securities that are then sold to investors, aiming at off-loading the mortgage risks from lenders to investors.
Step-by-step explanation:
The type of funding that occurs when a lender borrows money from an investor and assigns the mortgage and note to the investor immediately after closing is known as securitization.
During the process of securitization, lenders sell their mortgages to financial companies, which then pool these mortgages to create large financial securities termed mortgage-backed securities, and subsequently re-sell them to investors.
This allows lenders to off-load the mortgage risks to investors who are seeking to potentially profit from the steady stream of income from the loans' repayments.
The credit rating agencies play a significant role in assessing the risks associated with these securities. However, it has been observed that these ratings were sometimes too lenient, contributing to financial instability.
Securitization also offers advantages such as diversifying risks for banks and allowing them to manage local financial risks better.
It enables banks to avoid being solely exposed to the financial well-being of the local economy by selling local loans and instead owning mortgage-backed securities that represent a mix of home loans from various parts of the country.