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 2
