Securitization may degrade credit quality because the process severs the link of lending and repayment (risk and reward)between the originator of the loan and the borrower.

Question

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Securitization involves pooling a large number of loans and then creating financial instruments (securities) backed by the cash flows from those loans. This severs the link between the originator of the loan (who used to service the loan and collect the repayments) and the borrower. As a result, the originator might not be as concerned about the borrower's creditworthiness or ability to pay back the loan, which can lead to lower credit quality. Additionally, investors who buy the securities might not have access to all the information they need about the underlying loans, which can increase the likelihood of defaults or other problems.

Securitization May Degrade Credit Quality Because the Process Severs the Link