Origination is the process that involves pooling of debt (with different risk-reward profiles) into portfolios, before selling them to to issuers. In other words, an origination is the process of initiating or starting an instrument or arrangement but without being the ultimate issuer (the party issuing it to potential holders/ bearers, etc.)

Origination may also involve creating a loan (e.g., a mortgage loan) and selling it to another party against origination fees. This process (loan origination) usually gives rise to a derivative product of a specific type: a security or product that derives its performance (cash flows) from that of another (e.g., mortgage-backed securities, MBSs).

Certain risks may play out in the origination process. Even all types of involved risks may have certain interrelation and additional effects. Credit risk and operational inefficiencies may give rise to liquidity problems and may exacerbate interest rate risk if the originator is unable to sell its mortgages in the secondary market.

Origination may create other types of risk mainly including product risk, borrower fallout risk, and reverse price risk. Product risk constitute the adverse situation where a loan that is offered or made may not be desired (i.e., in demand) on the current secondary markets. Even if such an undesired product can be sold, sale will be effected at a heavy discount to its value. An example is a mortgage loan that is originated but prior to close it turns out that investors are not interested in holding it (i.e., providing lending in return for certain interest rate). Borrower fallout risk arises if and when the loan does not close due to an action or inaction of the borrower.

Reverse price risk occurs when a lender (mortgage banker) commits to sell loans (mortgage loans) to an investor at rates prevailing at the time of application, while the note rates being set when the borrowers close the transaction.

In addition to these risk, operational inefficiencies can exacerbate staff turnover, increase number of pools with no final certification, drive up production costs, or adversely impact the ability to account for documentation requirements (for lenders/ investors).