Securitization involves pooling debt obligations, such as loans or receivables, and creating securities backed by the pool of debt obligations called asset-backed securities (ABS). The cash flows of the debt obligations are used to make interest payments and principal repayments to the holders of the ABS.

Since each security only contains a fraction of each underlying asset, the risk of default is distributed across a wide range of assets. However, if the underlying assets are of low quality, the security can suffer from widespread defaults during an economic downturn.

Asset-backed securities (ABS) are created by pooling together non-mortgage assets, such as student loans. Mortgage-backed securities (MBS) are formed by pooling together mortgages. ABS and MBS benefit sellers because they can be removed from the balance sheet, allowing sellers to acquire additional funding.