The procedure through which an issuer generates a financial instrument by uniting other financial assets and then marketing diverse layers of the repackaged instruments to depositors. The process can incorporate any type of monetary asset and endorses liquidity in the marketplace.
Mortgage-backed securities are a flawless example of securitization. By joining mortgages into one large pool, the issuer can split the large pool into minor pieces built on each individual mortgage’s inherent risk of defaulting and then sell those smaller pieces to investors.
The process creates liquidity by permitting smaller investors to obtaining shares in a larger benefit pool. Using the mortgage-backed security example, individual selling investors are able to buy shares of a mortgage as a kind of bond. Without the securitization of mortgages, retail investors may not be able to pay for to buy into a large pool of mortgages.