securitize

Securitize is the process of converting a pool of illiquid financial assets into tradeable securities by pooling the assets and selling interests in the pool to investors. The assets are transferred to a special purpose vehicle (SPV) or special purpose entity, which then issues asset-backed securities (ABS) backed by the cash flows from the underlying assets. The SPV diversifies risk away from the original issuer and provides bankruptcy remoteness, while investors receive payments from interest and principal as the assets perform.

The securitization process typically involves several steps: originating or selecting a pool of assets (such as mortgages, auto loans, credit card receivables, or student loans); transferring the assets to the SPV; structuring the securities into tranches with different priorities for payments and risk exposure; adding credit enhancements (for example, overcollateralization, reserve accounts, subordination, or third-party guarantees); appointing a servicer to manage collections; obtaining ratings from credit agencies; and distributing proceeds to investors.

Common asset types include residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), auto loan and lease ABS, credit card receivables, student loans, and other receivables-backed securities.

Benefits and risks: securitization provides liquidity to originators, enables capital efficient funding, and offers investors access to diversified cash flows. Risks include model dependence, complexity, opacity of underlying asset performance, correlation risk among tranches, and potential systemic effects highlighted by financial crises. Regulatory environments impose disclosures, capital requirements, and, in many jurisdictions, risk-retention or “skin in the game” requirements for originators.

In summary, securitize describes turning streams of credit or other receivables into marketable securities through an SPV framework, balancing funding needs with risk management and regulatory compliance.