What does the term "securitization" refer to in mortgage financing?

The term "securitization" in mortgage financing specifically refers to the process of pooling various mortgage loans together and converting them into securities that can be sold to investors. This financial practice allows lenders to create more liquidity by selling these pooled loans as financial instruments, often referred to as mortgage-backed securities (MBS). This not only enables them to recover capital and make additional loans but also provides investors with a way to invest in the real estate market in a less direct manner.

By pooling together many loans, the risk is spread out, and investors can benefit from the diversification of the underlying assets. In this process, the cash flow from the mortgage payments made by the homeowners is used to pay interest to the investors who purchase these securities. Securitization plays a critical role in the mortgage market by enhancing the availability of credit and promoting the overall efficiency of financial markets.