What is Securitization of an Asset?

Question

I do not understand it.

In: Economics

Answer 1

You take many assets with similar characteristics, for example mortgage loans held by a bank with similar rates and risk characteristics. Each of those assets have cash flows into the bank, basically the monthly payments made by the borrower. Then the bank will sell them to a securitization entity which will bundle up those assets and create new assets called securities which represent the cash flows on the assets which were securitized. These are them sold to various third party investors. What this does is it allows the banks to monetize these assets through selling them to the securitization entity. And the investors can purchase new assets based on their risk appetite and required return.