Final answer:
The security described is a mortgage-backed security (MBS). These are formed through securitization, allowing investors to invest in mortgage pools without owning individual mortgages. However, this process can promote riskier lending practices, as observed with subprime and NINJA loans.
Step-by-step explanation:
The security that your client's co-worker is likely holding, which allows an easy and low-risk way to invest in mortgages without owning them directly, is a mortgage-backed security (MBS). Mortgage-backed securities are created from the process of securitization, where banks sell their mortgages to financial companies. These companies then pool the mortgages to create large financial securities and resell them to investors. Investors are attracted to MBS as they offer what is perceived as a steady stream of income, provided that the borrowers make their loan repayments.
However, there is a downside to securitization. In the context of subprime loans, banks that intended to sell the loans might issue riskier loans with less scrutiny. This led to the proliferation of NINJA loans, which contributed to the financial crisis when borrowers were unable to repay. The market players, including rating agencies and regulators, were too lenient or passive during the rise of the MBS market, failing to recognize the inherent risks.