Securitization: An Overview

Securitization* is the process of creating securities by pooling together various cash-flow producing financial assets. These securities are then sold to investors. Securitization, in its most basic form, is a method of financing assets.

Any asset may be securitized as long as it is cash-flow producing. The terms asset-backed security (ABS) and mortgage-backed security (MBS) are reflective of the underlying assets in the security.

Securitization provides funding and liquidity for a wide range of consumer and business credit needs. These include securitizations of residential and commercial mortgages, automobile loans, student loans, credit card financing, equipment loans and leases, business trade receivables, and the issuance of asset-backed commercial paper, among others.

Securitization transactions can take a variety of forms, but most share several common characteristics. Securitizations typically rely on cashflows generated by one or more underlying financial assets (such as mortgage loans), which serve as the principal source of payment to investors, rather than on the general credit or claims-paying ability of an operating entity. Securitization allows the entity that originates or holds the assets to fund those assets efficiently, since cashflows generated by the securitized assets can be structured, or “tranched,” in a way that can achieve targeted credit, maturity or other characteristics desired by investors.