The concept of securitization refers to the process through which an issuer creates a financial instrument by combining other financial assets and marketing these new instruments to investors. It encompasses any type of financial asset and contributes to the liquidity on the market.
In securitization, a financial asset little liquid, such as a home, in a more liquid fixed income security. The banking entity transfers the credit risk through credit derivatives to another counterparty. The mortgage loans They are usually the most transformed financial assets, since this transformation is included in the conditions in their contracts.
Securitization example
To better understand this concept we will use an example of securitization. If a person decides to start a business that is dedicated to buying and selling homes, by acquiring the first and renting it, they will get money that will not be enough to continue with the purchase of more homes. Yes, he could mortgage the house he bought and with the money obtained he could buy a second house. Something similar is done by banks, but at the time of mortgaging the home what they do to obtain money is to secure it. For this, they issue bonds guaranteed by said property, which in the event that they cannot pay the bonds for the bankruptcy from the bank the buyers of the bonds would end up taking over the house.
Titling is the best way to obtain more liquid assets. From the bank's credit portfolio, a series of assets will be chosen that have sufficient characteristics to be transformed and that are of a similar nature. These securities are accumulated in a portfolio that will be sold to a fund specially constituted for operation. This way, the bank will be able to dispose of low liquid assets.