Securitization

Securitization is the financial process of pooling various types of contractual debt such as mortgages, auto loans, credit card receivables, or student loans, and selling consolidated securities backed by these assets to investors. The process transforms illiquid assets into liquid, tradeable securities. For example, a bank might pool 5,000 mortgages worth $1 billion, transfer them to a special purpose vehicle (SPV), and issue mortgage-backed securities against this pool. This allows the bank to remove loans from its balance sheet, free up capital for new lending, and transfer risk to investors. Securitization provides benefits including increased liquidity, risk distribution, and lower funding costs. However, it also played a central role in the 2008 financial crisis when subprime mortgage securitizations failed. Modern securitization includes enhanced disclosure, risk retention requirements (originators must keep 5% of risk), and improved rating methodologies. The global securitization market exceeds $10 trillion.