Securitisation refers to the creation and issuance of new debt securities, called asset backed securities, that are backed by a pool of other debt securities. The most common type of asset-backed security is backed by a pool of mortgages. In some parts of the world, these asset-backed securities may be referred to as mortgage-backed securities.

Mortgage-backed securities are based on a pool of underlying residential mortgage loans (home loans) or on a pool of underlying commercial mortgage loans. Mortgage loans are loans to homeowners or owners of other real estate who repay the loans through monthly payments. To create mortgage-backed securities, a financial intermediary bundles a pool of mortgage loans from lenders and then issues debt securities against the pool of mortgages.

Mortgage-backed securities have the advantage that default losses and early repayments are much more predictable for a diversified portfolio of mortgages than for individual mortgages. This feature makes them less risky than individual mortgages. Mortgage-backed securities, a diversified portfolio of mortgages, may be attractive to investors who cannot service mortgages efficiently or evaluate the creditworthiness of individual mortgages. By securitising mortgage pools, mortgage banks allow investors who are not wealthy enough to buy hundreds of mortgages to gain the benefits of diversification, economies of scale in loan servicing, and professional credit screening. Other asset-backed securities are created similarly to mortgage-backed securities except that the types of underlying assets differ. For instance, the underlying assets can include credit card receivables, auto loans, and corporate bonds.

Securitisation improves liquidity in the underlying asset markets because it allows investors to indirectly buy assets that they otherwise would not or could not buy directly. Because the financial risks associated with security pools are more predictable than the risks of the individual assets, asset-backed securities are easier to price and, therefore, easier to sell when investors need to raise cash. These characteristics make the markets for asset-backed securities more liquid than the markets for the underlying assets. Because investors value liquidity, they may pay more for securitised assets than for the individual underlying assets.

Investors who buy asset-backed securities receive a portion of the pooled monthly loan payments. Unlike typical debt securities that offer coupon payments on a quarterly, semiannual, or annual basis and a single principal payment paid at the maturity date, most asset-backed securities offer monthly payments that include both an interest component and a principal component.