Securitization of Private Debt

What is Asset Securitization?

Asset securitization is a process where loans and other types of receivables are bundled together and sold as "asset-backed" securities. Credit originators (like banks) collect loans and receivables, such as mortgages, credit card debts, or auto loans, into a package. This package of loans is then converted into asset-backed securities. These securities are financial products that investors can purchase, essentially buying the right to receive payments from the underlying loans.

Origin of Asset Securitization

Asset securitization began in the 1970s with the structured financing of mortgage pools. Before this time, banks typically held onto loans until they matured or were paid off, a practice known as portfolio lending. These loans were primarily funded by customer deposits or by borrowing, which was a direct responsibility of the bank rather than being tied to specific assets.

Post-World War II Demand for Housing Credit

After World War II, banks and other financial institutions struggled to keep up with the growing demand for housing credit. To solve this issue, these institutions looked for new ways to increase the availability of mortgage funding. Recognizing a market opportunity, investment bankers developed a new investment vehicle that grouped together specific mortgage loans, managed the credit risk, and structured the cash flows from these loans in a way that would attract investors.

Expansion Beyond Mortgages

While it took time to refine the securitization of mortgages, it soon became clear that this approach could be used for other types of loans as well. Loan originators saw that the securitization process—whereby loans are bundled, risks are managed, and payments are structured—could be applied to many other kinds of receivables, not just mortgages.

Growth and Evolution Since the 1980s

Since the mid-1980s, advances in technology and the rise of more sophisticated investors have driven rapid growth in asset securitization. The rate at which different types of assets are being securitized has been impressive, with a wide range of companies now utilizing securitization. Additionally, the pool of investors interested in these products has expanded significantly, making asset securitization one of the fastest-growing activities in the capital markets.