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Securitization is a process of bundling together smaller loans (like mortgages) into standard debt securities.
The process of securitization involves pooling specific asset classes so they can be repackaged into interest-bearing securities. The purchasers of the securities receive interest and principal payments from the assets.
The process of turning non-tradable assets into tradable securities is known as securitization. It is a kind of structured finance that divides risk by pooling debt instruments and issuing new securities that are backed by the pool.
The credit risk of certain borrowers can be reduced by the level of detail in pools of securitized assets. Securitized debt's credit quality is non-stationary, in contrast to regular corporate debt, because of volatility variations that rely on time and structure.
The credit risk of all tranches of structured debt is reduced if the deal is properly designed and the pool performs as anticipated; nevertheless, if badly structured, the impacted tranches may suffer significant credit losses and degradation.
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