What is the process of pooling together similar loans to create mortgage-backed securities called?

The process of pooling together similar loans to create mortgage-backed securities is known as securitization. This involves aggregating various individual mortgage loans into a single financial instrument, which is then sold to investors. By doing this, lenders can provide liquidity to the mortgage market, as they are able to sell the loans rather than holding them on their balance sheets. The income generated from the underlying loans is used to pay interest and principal to the investors who have purchased the mortgage-backed securities. Securitization helps to spread risk among multiple investors and can make mortgage financing more accessible for borrowers.

The other concepts mentioned, such as diversification, capitalization, and collateralization, serve different purposes. Diversification refers to the strategy of spreading investments across various assets to reduce risk. Capitalization often pertains to the process of funding or financing a business and doesn’t specifically relate to the creation of mortgage-backed securities. Collateralization involves backing a loan or other financial obligation with an asset, but it does not encompass the entire process of pooling loans for the purpose of creating securities. Therefore, securitization specifically captures the essence of transforming a group of loans into an investment vehicle that can be traded in financial markets.