Securitization

Securitization is the financial process of pooling various types of debt—including mortgages, car loans, or Credit card debt—and selling them as consolidated Securities to investors. This process transforms illiquid Assets into liquid Assets, providing lenders with immediate Capital while distributing the risk of default among multiple investors.

For example, a bank might bundle a collection of residential mortgages into a single security, known as a mortgage-backed security (MBS). Investors purchase Shares of this MBS, receiving payments from the underlying mortgage repayments.

In the case of a large Corporation, they may securitize their accounts receivable by packaging these receivables and selling them to investors as Asset-backed Securities (ABS). This allows the Corporation to access cash quickly instead of waiting for customers to pay their invoices.

Another notable case is the 2008 financial crisis, where the securitization of subprime mortgages led to widespread defaults. The failure of mortgage-backed Securities played a significant role in the ensuing economic downturn.