Final answer:
Mortgage brokers must disclose to borrowers that they cannot guarantee acceptance into any specific loan program early in their relationship. Reassurance to banks can include thorough financial disclosure, credit checks, including a cosigner, or offering collateral. Securitization has led to banks issuing riskier loans, as they could sell these loans as securities, detaching from the consequences of borrower defaults.
Step-by-step explanation:
The mortgage broker must disclose to the borrower that they cannot guarantee acceptance into any specific loan program as early as possible, usually at the outset of their relationship. This disclosure is crucial for transparency and managing expectations. Potential borrowers should be informed that while a broker can aid in the process and apply for loans on their behalf, the ultimate decision lies with the lending institutions based on their vetting criteria.
In the context of financial markets and mortgage loans, it's important to consider ways to reassure banks when faced with imperfect information about a borrower's creditworthiness. One method is to thoroughly fill out financial forms, revealing sources of income and undergoing a credit check. Additionally, including a cosigner or offering collateral, such as property, can offer additional assurance to the lender.
The practices around mortgage lending changed significantly with the reliance on securitization, which led to the issuance of subprime loans, including the infamous NINJA loans. Banks that once kept loans as assets and thus had a high incentive to vet borrowers rigorously became more lenient when they could sell these loans as securities, often with limited repercussions for the originating bank if the borrower defaulted.