Securitization

AAA

DEFINITION of 'Securitization'

The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.

INVESTOPEDIA EXPLAINS 'Securitization'

Mortgage-backed securities are a perfect example of securitization. By combining mortgages into one large pool, the issuer can divide the large pool into smaller pieces based on each individual mortgage's inherent risk of default and then sell those smaller pieces to investors.

The process creates liquidity by enabling smaller investors to purchase shares in a larger asset pool. Using the mortgage-backed security example, individual retail investors are able to purchase portions of a mortgage as a type of bond. Without the securitization of mortgages, retail investors may not be able to afford to buy into a large pool of mortgages.

RELATED TERMS
  1. Loan Participation Note - LPN

    A fixed-income security that permits investors to buy portions ...
  2. Pool Factor

    The percentage of the original principal that is left to be distributed ...
  3. Principal Only Strips - PO

    A type of fixed-income security where the holder is only entitled ...
  4. Lewis Ranieri

    Former bond trader and former vice chairman of Salomon Brothers ...
  5. Structured Investment Vehicle - ...

    A pool of investment assets that attempts to profit from credit ...
  6. Asset-Backed Security - ABS

    A financial security backed by a loan, lease or receivables against ...
Related Articles
  1. Behind The Scenes Of Your Mortgage
    Insurance

    Behind The Scenes Of Your Mortgage

  2. The Bond Market: A Look Back
    Mutual Funds & ETFs

    The Bond Market: A Look Back

  3. Investing In Securitized Products
    Insurance

    Investing In Securitized Products

  4. An In-Depth Look At The Credit Crisis
    Credit & Loans

    An In-Depth Look At The Credit Crisis

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center