Final answer:
The main difference in loan servicing between mortgage brokering and mortgage banking is that brokers do not service loans, while mortgage banks may service loans they originate. Securitization, however, can lead mortgage banks to sell the loans, incentivizing them to issue risky subprime loans.
Step-by-step explanation:
The main difference between mortgage brokering and mortgage banking with regard to loan servicing lies in the relationship with the loan after it is originated. A mortgage broker acts as an intermediary, helping borrowers connect with lenders and often moving on after the loan is closed. They do not typically service loans themselves. In contrast, mortgage banks may both originate and service loans, retaining a long-term interest in the borrower's ability to repay. However, when it comes to the practice of securitization, many mortgage banks sell the loans they originate. This practice can lead to a reduced incentive to ensure that the borrower can repay the loan, resulting in the issuance of risky subprime loans, including those known as NINJA loans.
Securitization involves bundling mortgage loans into financial securities that are sold to investors, which can lead to a disconnect between the lender and the financial consequences of a borrower's default. Investors in these mortgage-backed securities receive a rate of return based on the collective payments of the mortgages underlying the security. The 2008-2009 financial crisis brought to light the risks associated with securitization and the aggressive issuance of subprime loans.