Brief Definition
Securitization is a financial process where various types of assets, such as loans or receivables, are pooled together and then sold as consolidated financial instruments, typically in the form of bonds, to investors.
Further Explanation
Securitization is a financial process where various types of assets, such as loans or receivables, are pooled together and then sold as consolidated financial instruments, typically in the form of bonds, to investors. This process converts illiquid assets into liquid securities, making it easier for the original lenders to obtain funds while providing investors with an opportunity to earn returns from diversified assets.
Example:
A bank has issued many mortgages to homeowners. Instead of waiting for homeowners to pay back their loans over many years, the bank pools these mortgages and sells them as mortgage-backed securities (MBS) to investors. Investors buy these securities, receiving regular payments from the mortgage payments made by homeowners, while the bank gets immediate funds from the sale.