The mortgage brokers that originated the loans often did not make a strong effort to evaluate whether the borrower pay off the loan, since they would quickly sell (distribute) the loans to investors in the form of mortgage-backed securities. This organized distribution business model was expected to principal-agent problems (also refer to more simply as agent problems) in which the mortgage brokers acted as agents for investors (the principal) but did not have the investor's best interest 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 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 mortgages they could not afford or to commit fraud by falsifying information on borrowers' mortgage applications to qualify them for their mortgages. Compounding this problem was lax regulation of organizations that were not required to disclose information to borrowers that would have helped assess whether they could afford the loans. 1. USING THE KNOWLEDGE OF PRINCIPAL-PROBLEM, DISCUSS THE SOLUTIONS AVAILABLE TO MITIGATE THE PRINCIPAL-AGENT PROMB LEM IN THE MORTGAGE MARKET. Explain whether this illustrates adverse selection or normal hazard. ( 25 marks)