Asset Backed Securities
Asset Backed Securities (ABS) are financial instruments that are backed by a pool of assets such as loans, mortgages, or credit card debt. These assets are bundled together and sold to investors. ABS provide a way for financial institutions to convert illiquid assets into tradable securities, thereby freeing up capital for further lending.
8 Key excerpts on "Asset Backed Securities"
eBook - ePubInvesting in Fixed Income Securities
Understanding the Bond Market
- Gary Strumeyer(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...(See Figure 15.1.) ABS issuance first topped $100 billion in 1995, $200 billion in 2000, and $400 billion in 2003. In 2003, U.S. ABS issuance totaled more than $435 billion, according to Merrill Lynch ABS Research. In 2003, automobile ABS, credit card ABS, and home equity loan (HEL) ABS represented 84 percent of new issuance volume. According to Bloomberg, as of July 31, 2004, almost $3.5 trillion of ABS have been issued and there are currently $1.5 trillion of ABS outstanding—clearly the ABS market is a significant part of the investment landscape. Figure 15.1 ABS Issuance Volume Source: Merrill Lynch. ASSET-BACKED SECURITIES DEFINED Asset-backed securities are bonds that are backed by pools of self-liquidating financial assets. While mortgage-backed securities also are technically backed by financial assets, based on their prominence in the fixed income markets (over 32 percent of Merrill Lynch’s U.S. Broad Market Index) and the fact that they were introduced to Wall Street ahead of all other collateralized paper, they are normally dealt with separately from other instruments. Given their history and significance, MBS have been dealt with in the preceding chapter, leaving this chapter dedicated to all other forms of ABS. Asset-backed securities can paradoxically offer sponsors lower funding costs, while at the same time offering the investment community securities with a stable credit profile, liquidity, and attractive yields. With ABS, less liquid financial assets typically held in a portfolio are pooled and converted into liquid securities that may be traded freely in the capital markets. For example, a portfolio of relatively illiquid auto loans can be removed from a marginally rated financial institution’s balance sheet and transformed into a triple-A rated publicly traded debt security. By effectively selling these loans to investors, the financial institution can now recycle the cash, making it available to create new loans...
eBook - ePub- Frank J. Fabozzi, Frank J. Fabozzi(Authors)
- 2018(Publication Date)
- Wiley(Publisher)
...Chapter 17 Non-Real Estate Asset-Backed Securities Frank J. Fabozzi, Ph.D., CFA Adjunct Professor of Finance School of Management Yale University Thomas A. Zimmerman Executive Director Head, ABS Research UBS Warburg Asset-backed securities are securities backed by loans or receivables. The securitization of residential mortgage loans is by far the largest type of asset that has been securitized and these securities are covered in Chapters 14 and 15. The collateral includes standard residential mortgage loans, home equity loans, and manufactured housing loans. Securities backed by commercial mortgage loans, commercial mortgage-backed securities (CMBS), are covered in Chapter 16. For asset-backed securities not backed by real estate, the largest sector is securities backed by credit card receivables, covered in Chapter 18. In this chapter, we discuss the basic features of asset-backed securities and the credit risks associated with investing in them. We then look at several types of asset-backed securities not backed by real estate or credit card receivables. FEATURES OF AN ABS Before we discuss the major types of asset-backed securities, let’s first look at the general features of the underlying collateral and the structure. Credit Enhancement All asset-backed securities are credit enhanced. This means that support is provided for one or more of the bondholders in the structure. Credit enhancement levels are determined relative to a target rating desired by the issuer for a security by each rating agency. There are two general types of credit enhancement structures: external and internal. We describe each type in Chapter 15. Amortizing versus Nonamortizing Assets The collateral for an ABS can be classified as either amortizing or non-amortizing assets. Amortizing assets are loans in which the borrower’s periodic payment consists of scheduled principal and interest payments over the life of the loan...
eBook - ePub- Moorad Choudhry(Author)
- 2010(Publication Date)
- Wiley(Publisher)
...These are debt instruments that have been created from a package of loan assets on which interest is payable, usually on a floating basis. The asset-backed market is a large, diverse market containing a wide range of instruments. Techniques employed by investment banks today enable an entity to create a bond structure from any type of cash flow; assets that have been securitised include loans such as residential mortgages, car loans and credit-card loans. The loans form assets on a bank or finance house balance sheet, which are packaged together and used as backing for an issue of bonds. The interest payments on the original loans form the cash flows used to service the new bond issue. Traditionally, mortgage-backed bonds are grouped in their own right as mortgage-backed securities (MBSs) while all other securitisation issues are known as asset-backed securities (ABS). Reasons for undertaking securitisation The driving force behind securitisation has been the need for banks to realise value from the assets on their balance sheet. Typically, these assets are residential mortgages, corporate loans and retail loans such as credit-card debt. Let us consider the factors that might lead a financial institution to securitise a part of its balance sheet. These might be for the following reasons: • if revenues received from assets remain roughly unchanged but the size of assets has decreased, this will lead to an increase in the return on equity ratio; • the level of capital required to support the balance sheet will be reduced, which again can lead to cost savings or allows the institution to allocate the capital to other, perhaps more profitable, business; • to obtain cheaper funding - frequently, the interest payable on ABS is considerably below the level payable on the underlying loans...
eBook - ePubThe Business of Investment Banking
A Comprehensive Overview
- K. Thomas Liaw(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...The call class investor will call the underlying pass-through from the callable class holder in a much more efficient way than the mortgage borrowers. Hence, the callable class holder will have a lower return relative to the pass-through investors if rates decline. ASSET-BACKED SECURITIES The market uses the term asset-backed securities (ABS) to refer to securities backed by non-mortgage assets such as installment loans, leases, receivables, home equity loans, tax liens, revolving credit, commercial loans, and high-yield bonds/loans. The total amount outstanding of these instruments has grown from $1.085 trillion in 1995 to $2.150 trillion in 2010. Annual issuance reached over $753 billion in both 2005 and 2006, and then declined to $107.4 billion by 2010. Table 10.4 lists the annual issuance of ABS by major types. Table 10.4 U.S. ABS Issuance ($ Billions) Those securities have been primarily a long risk market. The recent development of a single name ABS credit default swaps (ABCDS) changed that. A credit default swap is a financial contract that allows the buyer of the contract to pass on default exposure of bonds, loans, or ABS to the seller of the contract. ABCDS will transform ABS away from long only to provide ABS participants the ability to short the market or hedge existing positions. Investors now can also take on ABS risk synthetically. The emergence of the ABCDS market will certainly add to the growth potential of the ABS market. Credit Card Receivables Credit card securitizations often come under master trust structure, in which the seller can sell multiple securities from the same trust, all of which share the credit risks as well as the cash flows from one large pool of credit card receivables. 3 For example, an issuer could transfer the receivables from one million credit card accounts to a trust and issue multiple securities in various denominations and sizes. When more financing is needed, the issuer transfers more accounts to the same trust...
eBook - ePub- Frank J. Fabozzi, Vinod Kothari(Authors)
- 2008(Publication Date)
- Wiley(Publisher)
...PART Three Review of ABS Collateral CHAPTER 8 Collateral Classes in ABS: Retail Loans In the previous chapters, we described the process of securitization, specifically with reference to mortgage-backed securities. Where the assets are not mortgage-backed, the securities that result out of securitization are referred to as asset-backed securities. Since securitization is essentially a device of integration and differentiation of assets, the asset that goes into the securitization process is of utmost significance. In this chapter, we study several prevailing asset classes, all belonging under the general label of asset-backed securities. COLLATERAL CLASSES: BASIS OF CLASSIFICATION Existing Assets and Future Flows From the viewpoint of whether the asset pool will comprise of existing cash flows, or expected cash flows, we make a broad distinction between existing assets and future assets. In an existing asset securitization, the cash flow from the asset exists and there is an existing claim to value. In a future flow securitization, there is no existing claim or contractual right to a cash flow; such contractual rights will be created in the future. For example, an airline company securitizing its future ticket receivables is a case of a future flow securitization, since it is based on expected cash flows. On the other hand, in case of securitization of loan receivables, we have an existing contractual claim on the cash flows—so, it is an existing asset. The distinction between existing assets and future flows is relevant from several viewpoints: 1. In future flows, as the cash flows are to be originated in future, there is a performance risk on the originator. Sometimes, this performance risk may be mitigated by guarantee by a third party. For instance, in the case of construction of infrastructure facilities, it is quite common for some state agency to provide a guaranteed return...
eBook - ePubReal Estate Valuation
A Subjective Approach
- G. Jason Goddard(Author)
- 2021(Publication Date)
- Routledge(Publisher)
...An answer key will appear at the end of this chapter. ABS CLO UO Synthetic CDOs DEVO RMBS CDO 2 HERF CMO ELO CBGB MBS CMBS CDO OREO ABBA While not all of the acronyms listed in this section represent investment alternatives, there are numerous choices from which an investor can choose. Mutual funds now have investment options that focus on the real estate sector (RMBS, CMBS, and REITs primarily). These options may be attractive for investors who are looking to diversify their investment portfolio with real estate, but do not necessarily like the associated debt and ongoing property management needs that owning investment property outright require. In this chapter we have toured the existing landscape of various MBS and have highlighted that the valuation subjectivity that is present for the single property does not vanish when the investment option changes to a pool of collateral options. For each property in the collateral pool, the subjectivity of valuation that exists at the single property level is still present, but this chapter has highlighted additional uncertainties associated with forecasting future repayment and in assessing the impact of economic, concentration, and interest rate changes on the mortgages present in whichever security option the investor prefers. ALPHABET SOUP ANSWER KEY ABS: Asset-backed securities (car loans, credit cards, receivables, etc.) CLO: Collateralized loan obligations…corporate loan bonds UO: Urge Overkill. Chicago rock band from the 1990s Synthetic CDOs: R&B Band from the 1970s… ok not really. These are CDOs that invest in credit default swaps or other non-cash assets to gain exposure to a portfolio of fixed income assets Devo: 1980s New Wave Band…whip it into shape! RMBS: Residential mortgage-backed securities including home loans, home equity loans, and some multifamily loans CDO 2: CDOs which invest in other CDOs HERF: Herfindahl index...
- Thomas Herold(Author)
- 2020(Publication Date)
- THOMAS HEROLD(Publisher)
...What are Mortgage Backed Securities (MBS)? Mortgage backed securities turn out to be a special kind of asset which have underlying collections of mortgages or individual mortgages that back them. To be qualified as an MBS, the security also has to be qualified as rated in one of two top tier ratings. Credit ratings agencies determine these ratings levels. These securities generally pay out set payments from time to time which are much like coupon payments. Another requirement of MBS is that the mortgages underlying them have to come from an authorized and regulated bank or financial institution. Sometimes mortgage backed securities are called by other names. These include mortgage pass through or mortgage related securities. Interested investors buy or sell them via brokers. The investments have fairly steep minimums. These are generally $10,000. There is some variation in minimum amounts depending on which entity issues them. Issuers are either a GSE Government Sponsored Enterprise, an agency company of the federal government, or an independent financial company. Some people believe that government sponsored enterprise MBS come with less risk. The truth is that default and credit risks are always prevalent. The government has no obligation to bail out the GSEs when they are in danger of default. Investors who put their money into these mortgage backed securities lend their money to a business or home buyer. Using an MBS, regional banks which are smaller may confidently lend money to their clients without being concerned whether the customers can cover the loan itself. Thanks to the mortgage backed securities, banks are only serving as middlemen between investment markets and actual home buyers. These MBS securities are a way for shareholders to obtain principal and interest payments out of mortgage pools. The payments themselves can be distinguished as different securities classes...
eBook - ePubThe Art of Credit Derivatives
Demystifying the Black Swan
- Joao Garcia, Serge Goossens(Authors)
- 2010(Publication Date)
- Wiley(Publisher)
...Part IV Asset Backed Securities 16 ABCDS and PAUG The big guys are the status quo, not the innovators. Kenneth Fisher 16.1 INTRODUCTION In Chapter 4 we discussed the synthetic single name CDS and described models to price it. We have outlined the importance of a CDS by itself and as an essential component of the corporate synthetic CDO asset class. We have also seen the fundamental role played by single name CDSs on the pricing algorithms for not only the corporate standardized credit indices but also for the bespoke corporate CDOs, via the correlation mapping techniques presented in Chapter 12. In this chapter we describe the CDS of ABS, also known as ABCDS. The instrument has existed since at least 1998 and its purpose was to provide a synthetic form of assets for CDOs of ABSs. Those first ABS CDO transactions were balance sheet CDOs, and the protection buyers realized a reduction of regulatory capital costs. Other protection buyers were engaged on negative basis trade deals, in which the investor buys an ABS bond and an ABCDS, realizing a gain as the spread of the bond was higher than the premium paid on the CDS plus its cost of funding the ABS bond. As expected, the documentation was nonstandard and based on the templates for corporate CDSs. The growth of subprime mortgages and interest of investors, especially hedge funds interested in taking a short position on subprime mortgages, brought up the necessity of a specific dealer transaction template for the instrument that indeed became available by mid 2005. It is interesting to notice that, as we mention in Chapter 22, exactly at this time Schiller was reporting the existence of a housing bubble in the US. Although we write about ABCDSs in general, we have written this chapter with ABCDSs of subprime mortgage backed securities in mind. In this book, the only index we price for CDOs of ABSs is the TABX.HE, the standardized credit tranches for subprime MBSs...
