Originators can maintain a connection to the original asset even after transferring it, by performing the role of a “servicer.” The servicer is the agent who collects the regular payments on the loan, debt, or lease, and then transfers it to a device known as a special purpose vehicle (“SPV”) . The originator, now acting as a servicer, would be paid a fee for performing this service. Originators may even sell the servicing right, yet another way your debt, loan, or lease is monetized beyond your contractual obligation.

The SPV takes the form of a trust, corporation, or a partnership established with the specific purpose of acting as the entity, which handled the stream of payments. Often times, the payments are transferred to a separate trust, which is then securitized further.

Investment banks would involve themselves by advising the SPV on how to structure their tranches and in other cases, in which market (public or private sector) to make these securitized assets available.

The SPV was critical to developing this financial market, because it turned illiquid assets (i.e. mortgages) into liquid assets that could be freely traded by investors and lenders. Lenders were able to shift interest rate risks and investors had an asset that was liquid and freely transferrable.

Problems for investors began to arise when mortgagors sought the opportunity to refinance their mortgages when interest rates dropped. The financial return on the initial mortgage was far more appealing to investors, so to provide yet another layer of insurance to investors that their financial return would be maximized, each security would be analyzed based on their prepayment risk (prepayment risk also covers refinances at lower interest rates) and the resulting classes that were created were called “tranches”. In the event of a default, investors in lower tranches would bear the loss before any higher-level investors.

The process by which these assets are pooled together, chopped up, and sold, is a highly complex and convoluted financial practice, which has come under severe scrutiny and has been criticized for creating the mess and risks that led to the subprime mortgage crisis of 2008.