Commodification

To be considered a commodity, an item must satisfy three conditions: 1) it must be standardized and, for agricultural and industrial commodities, in a "raw" state; 2) it must be usable upon delivery; and 3) its price must vary enough to justify creating a market for it.

Most people understand commodification as it pertains to agricultural commodities like corn, soybeans, cotton, or other raw materials (i.e., the idea that "it's all the same."), but financial instruments can be commoditized, too.

For example, in the past, every mortgage issued was considered unique -- that is, the terms and conditions of the loans were customized to the borrower and the property. Over time, however, the Federal National Mortgage Association (Fannie Mae) Mac), and the Government National Mortgage Association (GNMA) commoditized mortgages by offering to buy almost any mortgage that met a set of conforming standards.

By creating a massive market for mortgages, these agencies encouraged banks to streamline and standardize the types of mortgages they offer to consumers.  Therefore, commodification is present in mortgages today.