One of the largest securitization markets is real estate. A vast majority of home loans are in the possession of the issuer for a short period of time, and in most cases, the issuer will quickly sell the mortgage to a secondary investor. The secondary investor then creates a large pool of these mortgages and divides them into smaller pieces. Advantages to this combination of mortgages include:
Distribution of Risk: Because securitization consists of multiple loans, multiple investors share the risk.
Market Stimulation: Mortgages are broken down into smaller loans through the securitization process, which attracts a greater number of investors.
Lower Mortgage Rates: Although interest rates are still dependent on an individual’s credit rating, the securitization process typically allows lenders to lend at a lower rate.
More Available Capital: Traditional loans require lenders to carefully track each individual loan and wait for its repayment. With securitization, lenders can more quickly package loans and sell them for the cash needed to issue new ones.