The mechanics
A bank originates £1 billion of mortgages. It transfers them to a Special Purpose Vehicle (SPV) — a legally separate entity that only holds those mortgages. The SPV issues mortgage-backed securities (MBS) in tranches to investors, raising £1 billion of cash that flows back to the bank. The bank has recycled its capital and can originate another £1 billion of mortgages. Investors now receive monthly interest and principal payments from the mortgage pool, passed through the SPV waterfall. The originating bank may or may not retain any portion of the risk — this "skin in the game" issue became central to regulatory reform post-2008.
Asset classes securitised
Securitisation is used across an extraordinary range of asset classes. Residential mortgage-backed securities (RMBS) are the largest market. Commercial mortgage-backed securities (CMBS) back office, retail, and industrial property loans. Auto ABS securitises car loans. Credit card ABS securitises revolving balances. Student loan ABS, equipment leases, solar panel instalments, and even music royalties have been securitised. The common thread: pooling creates diversification, structuring creates credit enhancement (senior tranches safer than the average underlying), and the resulting securities are more liquid and accessible to a broader investor base than the underlying loans.
The "originate-to-distribute" problem
Traditional banking used an "originate-to-hold" model: the bank made loans and kept them on its balance sheet, aligning its incentives with loan quality. Securitisation enables "originate-to-distribute": banks originate loans primarily to sell them, passing the credit risk to bond investors. This misaligns incentives — if the bank doesn’t bear the loss on bad loans, it has weaker incentives to screen borrowers carefully. The US subprime mortgage boom of 2003–2007 was the extreme manifestation: mortgage brokers earned fees on origination and faced no consequence if borrowers defaulted after securitisation. Post-2008, risk retention rules in the EU and US require originators to retain at least 5% of securitised exposures — restoring some skin in the game.
“Securitisation is one of the great financial innovations of the 20th century — it democratised mortgage credit and lowered borrowing costs for millions. Its misuse in 2003–2007 was a perversion of the mechanism, not an indictment of it.”
What this means for you
Securitisation directly affects your cost of borrowing. The ability of UK banks to securitise mortgages and pass them to pension funds, insurance companies, and other fixed income investors is one reason mortgage rates are lower than they would otherwise be — competition from capital markets disciplines bank lending margins. When securitisation markets seize (as in 2008 and briefly in 2020), banks cannot recycle capital, new lending dries up, and credit conditions tighten sharply. Monitoring credit spreads on RMBS and ABS markets provides an early warning signal of credit stress before it reaches the real economy.