The overrating of mortgage-backed securities prior to the financial crash of 2007-2009 was generally attributed to:
A) the fact that customers desiring the ratings paid for them.
B) the fact that the sellers of the securities paid for the ratings.
C) overzealousness in the securities market.
D) the wave of foreclosures prior to and during the financial crash.

Question

Quizplus · Accepted Answer

The overrating of mortgage-backed securities prior to the financial crash of 2007-2009 was mainly attributed to the fact that the sellers of the securities paid for the ratings. This posed a conflict of interest as the ratings agencies were incentivized to rate these securities higher than they actually deserved to get more business from these sellers. This led to a false sense of security among investors who believed that these securities were safer than they actually were, which eventually contributed to the financial crash.

The Overrating of Mortgage-Backed Securities Prior to the Financial Crash