Securitization.

In plain English

In securitization, a sponsor transfers loans such as mortgages, auto notes, or card balances to a separate legal entity that issues securities backed by the borrowers' payments. The securities are usually sliced into tranches with different priority, so the senior slice gets paid first and the junior slice absorbs the first losses in exchange for a higher yield. Selling the loans frees the lender's capital to make new ones, which is why mortgage rates depend on this market working. The structure also stretches the distance between the person underwriting a loan and the person bearing its default risk, a weakness the 2008 crisis exposed. Risk retention rules now require sponsors to keep a slice of the deals they create.

01Why it matters

Most U.S. mortgages are securitized, so the price investors pay for these bonds is a direct input into the rate you are quoted, no matter which lender takes your application.

02The math, step by step

Say $500 million of auto loans are pooled. The structure issues $400 million of senior bonds, $75 million of mezzanine, and keeps $25 million of equity. Losses of $20 million wipe out most of the equity slice and leave both bond classes fully paid.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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