Securitization
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. Investopedia Says:
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:
Asset-Backed Security - ABS
Catastrophe Bond - CAT
Inflation-Protected Security - IPS
Loan Participation Note - LPN
Match-Rate Funds
Mortgage-Backed Securities - MBS
Pool Factor
Principal Only Strips - PO
Structured Finance
Structured Investment Vehicle - SIV |