securitization
The process of pooling various types of debt — mortgages, car loans, credit card debt — and selling them as securities to investors.
Example
“Securitization transformed individual mortgages into mortgage-backed securities, allowing global investors to fund US housing.”
Memory Tip
SECURITIZATION = bundle loans together, sell as securities. Turns illiquid loans into tradeable assets.
Why It Matters
Securitization affects the interest rates you pay on loans and mortgages because it determines how lenders fund new loans. When banks can sell their loans as securities, they have more money to lend to new borrowers, which can increase competition and potentially lower rates for you.
Common Misconception
Many people think securitization means their original lender still owns their loan, but actually their loan obligation gets transferred to the investment pool. This is why your mortgage payment might get sold to a different company multiple times during the loan term.
In Practice
A bank might originate 1,000 mortgages worth 250 million dollars total, then bundle these mortgages together and sell them to investors as mortgage-backed securities. The investors receive monthly payments from the homeowners, and the bank gets its capital back immediately to issue more loans to new customers.
Etymology
SECURITY (tradeable financial instrument) + -IZATION (process of converting to). Converting loans into tradeable SECURITIES.
Common Misspellings
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See Also
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