Securitization funds America’s household and commercial debt
Securitization expands the availability of credit to consumers and commercial end users.
Securitization is the process of converting assets with stable cash flows – like auto loans, mortgages, student loans, and credit card debt – into securities. Those securities are then sold to investors. Last year, securitization funded more than 50% of household debt by allowing financial institutions to provide more credit to consumers, often at a lower cost.
Securitization is also a key component of commercial financing including commercial mortgages, equipment loans and leases, and business loans.
Financial institutions use securitization to transfer the credit risk of the assets they originate from their balance sheets to investors who seek a return on their investment, thereby expanded the availability of credit to consumers and commercial end users.
In 2023, $1.3 trillion of mortgage-backed securities and $270.5 billion of asset-backed securities were issued in the capital markets.
Securitization lowers the cost of credit for consumers
Asset-Backed Securities (ABS) are securities collateralized by a pool of assets, typically auto loans, student loans, or credit card debt.
$388.5 billion of asset-backed securities was issued in 2024. This issuance means that more credit can be provided to consumers at a lower cost, which stands in contrast to Europe. There, bank lending is a far greater component of consumer and commercial lending, and the cost of consumer credit is therefore generally higher.
Securitization provides steady access to mortgages
More than 70% of mortgage debt is funded by securitization. A pool of mortgages serves as collateral for mortgage-backed securities (MBS), which are securitized mortgages.
The vast majority of MBS are Agency MBS, which are issued by the GSEs (Freddie Mac and Fannie Mae).
The liquidity and efficiency of the MBS market attracts a deep and diverse investor base and as a result, loans are more available, and at a lower, less volatile cost to consumers. Indeed, studies have quantified how securitization has lowered the cost of obtaining a mortgage.
Importantly, the To-Be-Announced (TBA) market also provides mortgage borrowers the ability to lock in rates prior to purchase and closing because it allows lenders to mitigate their interest rate risk.