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Economics L The mortgage brokers that originated the loans did not make a strong effort to evaluate whether the borrower could pay off the loan, since they would quickly sell (distribute) the loans to investors in the form of mortgage-backed securities. This originate-to-distribute business model was exposed to principal-agent problems, in which the mortgage brokers acted as agents for investors (the principals) but did not have the investors' best interests at heart. Once the mortgage broker earns his or her fee, why should the broker care if the borrower makes good on his or her payment? The more volume the broker originates, the more he or she makes. Risk-loving investors lined up to obtain loans to acquire houses that would be very profitable if housing prices went up, knowing they could 'walk away" if housing prices went down. The principal-agent problem also created incentives for mortgage brokers to encourage households to take on mortgage they could not afford, or to commit fraud by falsifying information on a borrower's mortgage applications in order to qualify them for their mortgages. Compounding this problem was lax regulation of originators, who were not required to disclose information to borrowers that would have helped them assess whether they could afford the loans. Using your knowledge of principal-agent-problem, discuss the solutions available to mitigate the principal-agent-problem in the mortgage market. Explain whether this illustrate adverse selection or moral hazard. (25 marks)