Final answer:
Securitization is the practice of selling mortgages to firms that pool them into mortgage-backed securities for investors, which led to a rise in risky subprime loans known as NINJA loans. This practice transferred risks from lenders to investors, causing banks to issue more subprime loans and ultimately contributing to the economic instability of the early 2000s.
Step-by-step explanation:
The mortgage industry practice where the loan is put in the broker's name but the actual funds are provided by a lender is known as securitization. This process involves financial institutions selling their mortgages to firms that pool the loans and create mortgage-backed securities, which are then sold to investors. The phenomenon of subprime loans flourished alongside securitization, characterized by features like low down-payments and insufficient scrutiny of borrowers' financial stability. Some of these risky loans were labeled as NINJA loans due to the borrowers' lack of income, job, or assets.
In the early 2000s, this practice disconnected the risk from the original lending institution and transferred it to investors, leading banks to readily issue these subprime loans. The ratings agencies and bank regulators initially failed to recognize the inherent risks in this burgeoning market for mortgage-backed securities.