Final answer:
The sectors of the residential mortgage-backed securities market are made up of lenders, financial companies, investors, and ratings agencies. Lenders securitize mortgages, which are then sold as securities to investors by financial companies. Investors faced significant losses when housing prices fell, and lenient credit ratings contributed to the banking crisis.
Step-by-step explanation:
The sectors of the residential mortgage-backed securities (RMBS) market can be described as a process where lenders securitize mortgages by selling them to financial companies. These financial companies then pool the mortgages to create large financial securities and subsequently sell these mortgage-backed securities to investors. This securitization process allows lenders to offload the risk of mortgage defaults to investors. Investors, in turn, expect a steady stream of income from these securities, provided that the borrowers make their mortgage repayments.
However, during the financial crisis that started in 2007, the downfall in housing prices and the recession made it difficult for borrowers to repay their loans. This led to a significant decrease in the value of mortgage-backed securities. Many banks that had invested heavily in what they believed were 'ultra-safe' parts of these securities, which were insulated from small or moderate losses, faced the reality of these assets being worth much less, leading to a large number of bank failures.
The ratings agencies were also a critical part of the RMBS market, as they provided credit ratings for these securities. Unfortunately, in retrospect, it is apparent that these agencies were too lenient in their ratings, contributing to the eventual banking crisis.