Definition
Securitization is the financial process of pooling assets (mortgages) in a Special Purpose Vehicle (SPV) that issues debt securities sold to investors.
**Steps**: 1. The lender grants mortgages (cash-flow generating assets) 2. Mortgages are transferred into an SPV (entity legally isolated from the lender) 3. The SPV issues securities backed by the interest and principal flows from the mortgages 4. Investors purchase these securities in exchange for periodic payment flows 5. Funds raised allow the lender to grant new loans
**Types of securities**: - **Pass-through**: mortgage payments are simply 'passed through' to investors - **CMO/CDO**: flows are structured into tranches (senior/junior/equity) with different risk/return profiles - **Canada Mortgage Bonds (CMB)**: Canadian version guaranteed by CMHC
**Systemic benefits**: - Frees up bank capital for new loans - Distributes credit risk to a larger number of actors - Fosters lower mortgage rates through institutional demand
**Risks (lesson from 2008)**: Excessive and opaque securitization of poor-quality (subprime) mortgage debt in the United States triggered the 2008 global financial crisis. In Canada, the system is more regulated (CMHC, government guarantee, strict qualification standards).