Securitized

Securitized refers to assets that have been converted into securities backed by a pool of underlying financial assets. The process, securitization, pools loans or receivables such as mortgages, auto loans, credit card balances, or student loans and transfers the ownership of that pool to a special purpose vehicle (SPV). The SPV issues securities to investors, and the cash flows from the assets, after fees and reserve accounts, are used to make payments to investors.

Structure: The SPV issues multiple tranches with different maturities and credit risk. Senior tranches have priority in receiving cash flows but offer lower yields; junior tranches absorb first losses. Credit enhancement techniques, such as subordination, overcollateralization, reserve funds, or third‑party guarantees, improve the perceived credit quality. A servicer collects payments from borrowers and passes them through to the SPV, which then distributes to security holders according to the waterfall.

Markets and asset classes: Securitized products include asset-backed securities (ABS), mortgage-backed securities (MBS), and, in more complex forms, collateralized debt obligations (CDOs). They can be used to finance various assets, including residential and commercial mortgages, automobile loans, credit card receivables, and student loans. For originators, securitization provides liquidity and risk transfer; for investors, it offers access to diversified cash flows and varying risk/return profiles.

Risks and regulation: Securitization can transfer credit risk but not all risk; complexity and opaqueness can hinder evaluation. Pre-crisis incentives and mispricing led to systemic risk in some markets. Since the 2000s, regulations such as the Dodd-Frank Act in the United States and Basel III in global banking have increased disclosure and risk retention requirements. Markets remain active, with ongoing reforms emphasizing transparency and standardization.