How were incentives misaligned during the housing crisis?

Question

Quizplus · Accepted Answer

Wall Street relied on local banks to assess risk, but local banks earned a commission on each mortgage sold. This created a misalignment of incentives where local banks wanted to sell as many mortgages as possible, without properly assessing the risk, in order to earn more commissions. Wall Street, on the other hand, relied on the local banks' assessments and packaged these mortgages into securities to sell to investors, earning a commission on each security sold. This led to a situation where risky mortgages were packaged into securities that were sold to investors who did not realize the risk, eventually leading to the housing crisis.

How Were Incentives Misaligned During the Housing Crisis