securitization

Securitization

Creating a more or less standard investment instrument such as the mortgage pass-through security, by pooling assets to back the instrument. Also refers to the replacement of nonmarketable loans and/or cash flows provided by financial intermediaries with negotiable securities issued in the public capital markets.

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Securitization

The process by which a company packages its illiquid assets as a security. For example, when a company makes an initial public offering, it effectively packages the company's ownership into a certain number of stock certificates. Securities are backed by an asset, such as equity, or debt, such as a portion of a mortgage. Securitization allows a company access to greater funding to expand its operations or investments, or some other reason.

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Securitization. Securitization is the process of pooling various types of debt -- mortgages, car loans, or credit card debt, for example -- and packaging that debt as bonds, pass-through securities, or collateralized mortgage obligations (CMOs), which are sold to investors.

The principal and interest on the debt underlying the security is paid to the investors on a regular basis, though the method varies based on the type of security. Debts backed by mortgages are known as mortgage-backed securities, while those backed by other types of loans are known as asset-backed securities.

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securitization

The process of taking many individual assets and combining them into a group,or pool,so that investors may buy interests in the pool rather than in the individual assets.The creation of collateralized mortgage backed securities is one example.The process increases the number of possible investors due to the ability to sell shares in the pool at relatively modest prices.In addition, because of the high degree of predictability inherent in large groups of things, the process of securitization increases predictability,lowers risk,and therefore increases value.

Example: On a single flip of a coin, how much would you bet that the coin would land heads up? On 20,000 flips of a coin, how much would you bet that it would land heads up fifty percent of the time, give or take two percent? This is a fundamental concept of securitization.

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Securitization

What Does Securitization Mean?

The process by which an issuer creates a financial instrument by combining other financial assets into a security 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 on the basis of each individual mortgage's inherent risk of default and then sell the smaller pieces to investors. The process enables 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 would not be able to afford to buy into a large pool of mortgages; considering the financial mortgage collapse of 2008, that might be a good thing.

Related Terms:
• Asset-Backed Security—ABS
• Derivative
• Mortgage-Backed Securities—MBS
• Subprime Loan
• Subprime Meltdown