Legal Definitions - securitize

Securitize refers to the process where a financial institution takes a collection of its assets, such as loans or future payment streams, and converts them into marketable financial instruments called securities. These securities are then sold to investors in the financial market. This strategy allows the original institution to remove these assets from its own financial records, which can improve its financial stability and free up capital. The freed-up capital can then be used to make new loans or pursue other investments.

Here are a few examples to illustrate this concept:

• Mortgage-Backed Securities: Imagine a large bank that has issued thousands of individual home mortgage loans to various homeowners. Instead of holding onto all these loans until they are fully repaid, the bank can group many of these mortgages together. It then creates new financial products, or securities, that represent a share in the future payments from these bundled mortgages. These securities are then sold to investors, who receive a portion of the principal and interest payments as homeowners repay their loans. By doing this, the bank removes the original mortgages from its balance sheet, receives cash from the sale of the securities, and can then use that cash to issue even more new home loans.

• Auto Loan Securitization: A company that specializes in financing car purchases accumulates a large portfolio of auto loans. To generate more funds quickly and reduce its exposure to individual loan defaults, the company can package hundreds or thousands of these auto loans into a single financial product. This product is then offered to institutional investors. When investors buy these auto loan-backed securities, they are essentially buying a right to receive a share of the future payments made by car owners. This allows the finance company to get immediate cash, which it can then use to provide financing for even more new car sales.

• Credit Card Receivables: A major credit card issuer has millions of customers who carry balances and make monthly payments. The issuer can decide to securitize a portion of these future credit card payments (known as receivables). They create securities backed by the expected stream of payments from a large pool of credit card accounts. These securities are then sold to investors. This process provides the credit card issuer with immediate cash, which they can use to expand their lending operations, offer new credit products, or invest in other areas, while transferring the risk and future cash flow of those specific credit card accounts to the investors.