Securitization
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What Is Securitization?
Securitization is the process of pooling many individual loans — such as mortgages, auto loans, or credit-card debt — and packaging them into securities that can be sold to investors. The investors receive a share of the payments made by the underlying borrowers, while the original lender converts illiquid loans into cash it can lend again. Securitization can spread risk across many investors and make credit more widely available, but it can also weaken lenders' incentive to check borrowers carefully if they plan to sell the loans on. The U.S. housing bubble was fueled partly by a rapid rise in the securitization of mortgages.
Why It Matters
Securitization matters because it was the machinery that connected risky home loans to the global financial system before the 2008 crisis. Mortgages were bundled into mortgage-backed securities and collateralized debt obligations and sold worldwide, so that when subprime borrowers defaulted, losses surfaced far from where the loans originated. Because lenders could offload loans, some relaxed their standards, and the complexity of the resulting securities made it hard to gauge who bore the risk. Securitization did not disappear after the crisis — it remains a core part of modern finance — but reforms sought to improve transparency, align incentives, and ensure lenders retain some stake in the loans they sell.