What is “debt securitization”?
“Debt securitization” works like this:
A commercial property such as a shopping center is mortgaged for $100 million. The owner has the property and the lender has a piece of paper. The lender wants to lend that $100 million again, so he turns around and “securitizes” the loan — packages it as a security and sells off pieces to investors. When he sells chunks of the loan, he gets cash in return — money he can loan to other property owners.
Home mortgages are also routinely packaged together and sold in the secondary market. This is another example of securitized debt — investment paper which is secured by real estate. There is generally a lower interest rate for such debt because it’s more secure than debt for which there is no security. In other words, if the borrower does not pay the property can be foreclosed and that reduces the investor’s risk.
The impact of securitized debt is very important. It means that mortgages can be available everywhere at roughly the same price, even if there is little cash in local banks and S&Ls. Debt securitization also means that you can buy a chunk of mortgage debt, perhaps a little piece of many different mortgage instruments. By having many investments rather than just one an investor may have less risk.
See securities brokers for information regarding the purchase of securitized debt.
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