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 to the investment risk tolerance of different types of investors. The process of securitization creates liquidity in the marketplace for the assets being securitized.Any type of asset can be securitized, but usually it’s an asset with periodic cash flow. The most common form of securitization is with home equity mortgages. In the example of home equity mortgages, a financial institution creates the mortgage, which is backed by claims against the underlying property. The originator then groups multiple mortgages into mortgage pools that are held in trust as collateral. The newly created mortgage-backed security is then sold in a secondary market to participants. Sometimes, the mortgage-backed security is broken up into separate pieces and those individual pieces, which have different levels of risk, are sold separately. For instance, the low-risk part of the pool may be purchased by pension funds seeking a secure, steady return. The higher risk part of the pool might be purchased by hedge funds willing to take a risk on mortgages that may or may not be paid off. As homeowners make their monthly mortgage payments, the money is funneled through the institution that holds the mortgages in trust. This institution then distributes the money to the various parties who purchased the mortgage-backed securities in the secondary market.