Securitisation in mortgages is a financial process that involves pooling various types of mortgage loans and then selling these consolidated debt as mortgage-backed securities (MBS) to investors. This process helps lenders to free up capital, allowing them to issue more loans, and provides investors with an opportunity to invest in real estate without having to directly manage properties.

Here’s how the securitisation process typically works:

1. Origination: A financial institution, such as a bank or a mortgage lender, originates a variety of mortgage loans to borrowers.
2. Pooling: The financial institution pools these individual mortgage loans into a single group, creating a portfolio of mortgages.
3. Special Purpose Vehicle (SPV): The pooled mortgages are then sold to a special purpose vehicle (SPV). An SPV is a separate legal entity created specifically for this purpose. The SPV helps to isolate the financial risk associated with the mortgage loans from the originating institution.
4. Issuance of Securities: The SPV issues mortgage-backed securities (MBS) to investors. These securities represent claims on the principal and interest payments made by borrowers on the underlying mortgage loans.
5. Tranching: The MBS are often divided into different tranches, or slices, each with varying levels of risk and returns. Senior tranches are considered safer and have a higher priority claim on the cash flows from the mortgage payments, while junior tranches are riskier but offer higher potential returns.
6. Sale to Investors: The MBS are sold to a wide range of investors, including institutions like pension funds, insurance companies, and individual investors. These investors receive periodic payments derived from the mortgage payments made by the borrowers.
7. Servicing: The originating lender or another designated entity continues to service the mortgage loans, collecting payments from borrowers and distributing the cash flows to MBS investors.

Benefits of Securitisation:

1. Liquidity: By converting illiquid mortgage loans into liquid securities, lenders can raise capital more efficiently and issue more loans.
2. Risk Distribution: Securitisation spreads the risk associated with mortgage defaults among a broad base of investors.
3. Investment Opportunities: It provides investors with a diversified investment option tied to the real estate market without direct involvement in property management.

Risks of Securitisation:

1. Complexity: The structure of MBS can be complex, making it difficult for investors to fully understand the risks involved.
2. Market Risk: The value of MBS is subject to changes in interest rates and housing market conditions.
3. Credit Risk: If a large number of borrowers default on their mortgage payments, it can negatively impact the returns for MBS investors.

Overall, mortgage securitisation is a crucial mechanism in modern financial markets, promoting liquidity and capital flow, but it requires careful management and regulation to mitigate associated risks.