Securitization is a financial practice that involves pooling various types of contractual debt, such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations, and selling them as a new security to investors. The process of securitization allows the original lender or creditor to remove assets from its balance sheets to underwrite additional loans, while investors profit by earning a rate of return based on the associated principal and interest payments made on the underlying loans and obligations by the debtors or borrowers.

Securitization can be used to finance simple, self-liquidating assets such as mortgages, but any type of asset with a stable cash flow can be structured into a reference portfolio that supports securitized debt. Securities can be backed not only by mortgages but by corporate and sovereign loans, consumer credit, project finance, lease/trade receivables, and individualized lending agreements.

The advantages of securitization include creating liquidity by allowing retail investors to purchase shares in instruments that would be unavailable to them, increasing access to credit, and potentially earning a higher rate of return on a risk-adjusted basis. However, securitizations are expensive due to management and system costs, legal fees, underwriting fees, rating fees, and ongoing administration. They also carry risks, such as credit loss, especially for structures where there are some retained strips, and lack of transparency regarding assets.

The main parties involved in securitization include the originator/sponsor, the servicer, the trustee/collateral agent, the issuer, the underwriter, and the investors. The main legal documents include the indenture and the offering document. Securities created through securitization can be divided into different sections called tranches, with each tranche carrying different degrees of risk and offering different yields.

In summary, securitization is a financial practice that involves pooling various types of contractual debt and selling them as a new security to investors. It can be used to finance various types of assets with a stable cash flow, but it also carries risks and can be expensive. The process of securitization involves several parties and legal documents, and securities created through securitization can be divided into different tranches with different degrees of risk and yields.