Microeconomics 13th Edition by Russell Sobel, David Macpherson, Richard Stroup, James Gwartney

Exercise 5

*When mortgage originators sell mortgages to Fannie Mae, Freddie Mac, and investment banks the originators have no additional liability for possible default by the borrower. How will this arrangement influence the incentive of the originators to scrutinize the creditworthiness of the borrower? Would the incentive structure be different if the originator planned to hold the mortgage until it was paid off? Why or why not?