By definition, a securitization is a process of converting an asset or assets into a security. By doing so, a handful of benefits are unlocked:
Often the pool of potential buyers expands to include those who can buy securities but not whole loans or individual assets.
Securities with small minimum denominations allow investors to get exposure to an asset where the underlying size of each asset may be many multiples larger than their desired investing amount. Ex. an investor can purchase $1000 worth of a mortgage backed security but might not be able to afford to purchase any individual home inside the securitization outright.
Investors can also benefit from the creation of completely new risk profiles through diversification. When an investor purchases a share of a securitization they’re relying on a diverse pool of assets (sometimes thousands or tens of thousands of assets) for repayment as opposed to a single asset. This is often a major selling point for securitizations to achieve investment grade ratings from rating agencies.
How does securitization work?
Typically there are four steps to a all securitizations no matter what the underlying assets are:
For a more detailed look at the use of warehouse facilities and off balance sheet SPVs click here
Overview of the advantages and disadvantages of securitizations for an Issuer:
