However, securitization also widened the separation of the originators from the ultimate holders of the loans – that is, those who bought securities backed by loans. In this setup, a classic principal-agent problem can arise if originators (the agents) do not have a sufficient incentive to shield the owners of the securities (the principals) from suffering higher-than-expected losses.
Against a backdrop of continued strong investor demand for high-yielding securities, some lenders began loosening underwriting standards for subprime mortgages in late 2005. Loans to subprime borrowers were approved with high loan-to-value ratios and incomplete income documentation.