Before the financial crisis the vast majority of the population had never heard of a securitization. But thanks to the incessant media coverage back then and movies like The Big Short the term is now part of the culture, although few people have a good understanding of the inner workings of a securitization.
What I want to do in this article is provide the casual observer with a more complete understanding of securitization, paying particular attention to how it applies to marketplace lending.
In its most basic form a securitization is just a pool of assets that have been packaged together and sold as if they were one asset. The underlying assets are typically loans or receivables of some kind that generate a regular cash flow. The new asset is a bond that can be bought and sold by large institutional investors.
The reason securitization is popular is that it provides the seller with a way to liquidate assets that would otherwise sit on their balance sheet for a long period. It also allows for a more efficient allocation of capital because it opens up the asset class to a broader pool of institutional investors. The proceeds are often used to originate more loans and the process is repeated. In this way a relatively small amount of capital can be put to work multiple times.