Understanding the Securitised Universe
The global securitisation market is a multi‑trillion‑dollar segment of fixed income, comprising bonds backed by pools of individual loans. While inherently complex, these products play a foundational role in financing housing, consumer spending, corporate activity, and commercial real estate.
From an investor’s perspective, securitised assets convert illiquid, privately originated loans into publicly traded securities. As such, securitised credit acts as a critical bridge between real‑economy lending and capital markets, expanding both funding capacity for borrowers and investment opportunities for investors.
What is securitisation?
Securitisation is the process by which income-generating assets – mortgages, consumer credit, corporate and sovereign loans, and project finance – are pooled together and converted into marketable securities that can be sold in the bond market. The process typically occurs in three stages:
- Loan origination and pooling: Financial institutions originate loans with similar characteristics and group them into a single pool.
- Structuring and issuance: The pooled loans are transferred to a special purpose vehicle (SPV), which issues interest‑bearing securities backed by the cash flows of the underlying assets.
- Cash flow distribution: Borrower repayments, comprising principal and interest, are passed through to investors according to predefined structural rules.
Securitisation can allow loan originators to remove existing loans from their balance sheet, thereby freeing up capacity to make new ones. Consumers may benefit from greater access to credit, while investors gain exposure to diversified loan cash flows within a large, liquid and tradable market.
How securitisation works
Main types of securitised credit
Securitised credit spans a wide range of sectors, structures, and risk profiles, defined by the type of underlying collateral and the distribution of cash flows to investors.
- Mortgage-backed securities (MBS)
MBS are debt obligations representing claims to the cash flows from pools of mortgage loans, most commonly on residential property. There are several types of MBS:
Agency mortgage-backed securities (MBS)
Agency MBS are residential mortgage bonds that carry guarantees from one of three U.S. federal agencies: Federal Home Loan Mortgage Association (“Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”), and Government National Home Loan Association (“GNMA” or “Ginnie Mae”).
This market is among the largest and generally the most liquid fixed income markets globally, alongside U.S. Treasuries. Agency MBS are typically issued as 15-year or 30-year fixed-rate securities, with coupon rates that broadly reflect the average mortgage rate in the underlying pool.
While the extent to which agency MBS are guaranteed varies by agency, investors in agency MBS are generally not exposed to credit losses resulting from borrower defaults.
Non-agency residential mortgage-backed securities (RMBS)
Non-agency RMBS are residential mortgage bonds that do not carry a guarantee from a government-sponsored entity.
Following regulatory reforms after the global financial crisis, today’s non-agency market mainly consists of mortgages that do not qualify for inclusion in agency pools. Examples include:
- Non-qualified loans: Loans to typically high-quality borrowers that do not meet agency underwriting criteria, such as self-employed individuals or foreign nationals.
- Jumbo loans: Mortgages that exceed the loan limits imposed by the agencies. These are often made to high-income earners and tend to be high quality loans overall.
- Investor loans: Loans used to purchase second homes or investment properties. These typically require higher underwriting standards and are often of high credit quality.
- Non-performing loans: Pools of loans that were once part of agency pools but became delinquent and were subsequently sold to investors at a discount. Investors may benefit if these loans become current again, often through loan modification.
- Subprime loans: Legacy subprime mortgage bonds issued before the GFC that are now mostly performing. Due to tighter post-crisis regulation, there is effectively no new issuance of subprime mortgage bonds today.
- Re-performing loans: Loans that are currently performing but were delinquent in the past and removed from the original MBS pool.
While diversification across a mortgage pool reduces the impact of individual borrower defaults, non-agency RMBS remain exposed to credit risk and therefore typically offer higher credit spreads than agency MBS.
- Commercial Mortgage-Backed Securities (CMBS)
CMBS are bonds backed by loans secured on commercial properties, most commonly in the office, multifamily, industrial, retail, and hotel sectors. The property owner (borrower) makes interest and principal payments on the mortgage, which in turn support payments to CMBS investors. CMBS can come in a wide variety of different structures and collateral types, but are typically grouped into the following categories:
- Conduit CMBS
Conduit CMBS, the most common form of issuance, are backed by a diversified pool of commercial mortgage loans from multiple borrowers. They typically contain dozens of loans across a range of property types. These bonds are typically structured around 10-year fixed-rate loans with strong prepayment protection.
- Single asset/single borrower (SASB)
SASBs are backed by one mortgage loan on either a single asset or a single portfolio of commercial real estate assets. As they are exposed to a single borrower, SASBs carry greater concentration risk than conduit CMBS. Investors are typically compensated through lower starting loan-to-value (LTV) ratios and higher embedded equity.
- Commercial real estate collateralised loan obligations (CRE CLOs)
CRE CLOs are backed by loans on commercial properties undergoing stabilisation or redevelopment across a wide variety of sectors. They share several structural features with corporate CLOs, including reinvestment periods, over-collateralisation, and interest coverage tests.
- Asset-backed securities (ABS)
ABS are securitisations of non‑mortgage consumer credit, including:
- Auto loans and leases
- Student loans
- Credit card receivables
ABS are usually sold in tranches, allowing investors to choose between senior, lower‑risk exposure and subordinated, higher‑yielding positions. This flexibility makes ABS a versatile tool for managing credit risk and income within portfolios.
- Collateralised Loan Obligations (CLOs)
CLOs are structured credit vehicles backed by diversified pools of leveraged corporate loans. These loans, which typically have lower credit ratings, are packaged into multiple tranches with varying risk and return profiles, allowing investors to access corporate loan cash flows with different levels of credit protection. Through diversification and subordination, CLOs redistribute credit risk across the capital structure rather than eliminating it.
CLOs are distinct from other securitised products because the underlying loan portfolio is actively managed during an initial reinvestment period, usually lasting several years. Portfolio outcomes therefore depend not only on credit conditions, but also on manager skill, making manager selection a key consideration. To support senior investors, CLOs incorporate structural safeguards such as over‑collateralisation and coverage tests, which have historically provided strong downside protection, including during periods of stress in the leveraged loan market.
Key features at a glance
Where securitised credit fits in the fixed income landscape
Securitised credit occupies a core position in the fixed income universe by converting private loans into investable, publicly traded securities. Instruments such as MBS, CMBS, ABS, and CLOs provide investors with exposure to the cash flows of households, consumers, and businesses, complementing traditional government and corporate bonds.
Spanning a wide range of risk, yield and liquidity profiles, securitised credit offers meaningful diversification and income potential within investment portfolios. The combination of scale, structural protections and access to real-economy lending, makes securitised assets an important bridge between public credit markets and private lending, helping investors balance liquidity, resilience, and returns across the fixed income spectrum.
