Securitization

Loading the player...

What is 'Securitization'

Securitization is 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.

BREAKING DOWN '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. Aggregator

    A party involved within the secondary mortgage market that purchases ...
  2. Securitize

    A pooled group of financial assets that together create a new ...
  3. Secondary Mortgage Market

    The market where mortgage loans and servicing rights are bought ...
  4. Pass-Through Rate

    The rate on a securitized asset pool - such as a mortgage-backed ...
  5. Net Interest Margin Securities ...

    A security that allows holders to access excess cash flows from ...
  6. Death Bond

    A security backed by life insurance which is derived by pooling ...
Related Articles
  1. Investing Basics

    What is Securitization?

    Securitization is the process of converting an asset, or group of assets, into a marketable security. Often times, the securitized assets are divided into different layers, or tranches, tailored ...
  2. Insurance

    Investing In Securitized Products

    Securitized assets are customizable and have a wide range of yields, making them an attractive asset class.
  3. Economics

    How Interest Rates Affect The Housing Market

    Understand how rate changes can affect home prices, and learn how you can keep up.
  4. Insurance

    Behind the Scenes of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.
  5. Credit & Loans

    How To Become a Mortgage-Backed Securities Analyst

    Specializing in structured or derivative credit products like mortgage-backed securities requires education and prior experience in the mortgage field.
  6. Investing Basics

    Understanding Financial Instruments

    Financial instrument is a general term used to describe a monetary asset.
  7. Home & Auto

    Shopping for a mortgage in 2016? Use this tool first.

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2016 can all be done online.
  8. Home & Auto

    Shopping for a mortgage in 2016? Use this tool first.

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2016 can all be done online.
  9. Investing

    What are Debt Instruments?

    A debt instrument is a documented financial obligation that enables the issuer to raise funds by borrowing money and repaying it in the future.
  10. Home & Auto

    Exploring Real Estate Investments: Buying And Owning Real Estate

    By Ian Woychuk, CFA In Chapter 2, we presented the investment selection matrix, which outlines your alternatives when choosing the kind of real estate investment to make. You can choose to invest ...
RELATED FAQS
  1. How does securitization increase liquidity?

    Learn how securitization increases affects working capital and liquidity, and why it matters for a company seeking to increase ... Read Answer >>
  2. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Answer >>
  3. What do mortgage lenders use the securitization food chain?

    Read about the origins of Chris Ferguson's securitization food chain, and find out how mortgage lenders could package and ... Read Answer >>
  4. What are some historical examples of debt securitization?

    Find out how debt securitization started, how it works and why the government facilitated the mortgage-backed security market ... Read Answer >>
  5. Why do banks securitize some debts, and how do they sell them to investors?

    Learn how and why banks securitize debt, how the securitized debt is sold to other investors, and how different the different ... Read Answer >>
  6. What are some of the arguments in favor of debt securitization?

    Find out how debt securitization creates benefits for loan originators, borrowers, investors and capital markets by diversifying ... Read Answer >>
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center