Asset-Backed Securities (ABS)

Asset-Backed Securities (ABS) are pools of loans that are抵押(or"backed") by an underlying pool of illiquid assets, which are then sold to investors as securities (a process known assecuritization).

The interest and principal payments from the underlying pool asset pool are passed on to the institutional investors that purchase the securities. However, the investors also take on the risks of the underlying assets. Probably the most well-known type of ABS is aMortgage-Backed Security (MBS).

Types of Asset-Backed Securities

There are many different kinds of ABS across different asset classes. The only real requirement for a group of assets to be potentially securitized is that it typically needs to generate cash flow from debt. The most common types of ABS are:

Home-equity Loans

Securities backed by home equity loans remain the largest asset class in the ABS market. A home equity loan is a type of mortgage that allows homeowners to borrow against the equity in their home.

For example, if you have a $500,000 loan outstanding on a $900,000 house, you are able to take out an additional loan, using the $400,000 of equity you currently hold as collateral.

Home equity loans are typically taken out by mortgage borrowers that have a low credit score and are often second priority or second lien behind the original mortgage on the house. Because of this additional risk, home equity loans often carry higher interest rates than a traditional mortgage.

Credit Card Receivables

Credit Card Receivables that are used as collateral for securities are backed by the cash flow from credit cards, which includes interest payments, principal repayments, and fees (annual fees and late payment fees).

Because credit card loans only have minimum monthly payments and do not have an actual maturity date, they are considered a non-amortizing loan, which is a loan with no payment schedule and no concept of prepayment.

由于信用卡应收账款没有到期日，因此可以建立锁定期限，借款人不会支付本金。在锁定期间支付的任何本金都将借给ABS，以保持信用卡应收款人池的规模。

Student Loans (SLABS)

Student Loans that are being securitized as asset-backed securities are known as SLABS, and are one of the main asset classes that are used for securitization.

Student loans can be broken up into two main categories; federal loans and private loans.

Federal Loansremain the most common type of loan for students, with 42.9 million Americans possessing some type of federal loan, according to theU.S Department of Education.

Private Loansare usually more difficult for students to obtain, as they require a very good credit score and usually have higher interest rates than regular federal loans.

学生贷款的资产支持证券是基于学生贷款的未偿债务，这些债务已包装到证券中并出售给投资者。平板使贷方能够获得更多的流动性，并为机构投资者提供另一种可行的选择。但是，与所有ABS一样，投资者仍然会承担学生贷款带来的风险default ratebe much higher than anticipated.

自动贷款ABS

自动贷款ABSare a type ofamortizingasset that is based on the cash flow from customer payments from a pool of auto-related loans, which include interest payments, prepayments, and principal repayments.

They are the second-largest sector in the ABS market and can be put into 3 different categories;

• Prime Auto Loan ABSs由向信用评分较高的借款人提供的贷款支持，大于680
  
• 非优势汽车贷款are made to borrowers with a slightly lower credit score, between 600 and 680
  
• Subprime Auto Loan ABSsare backed by loans made to borrowers that have a poor credit history, which is typically lower than a score of 600

As an aside, auto loans are rarely refinanced even when interest rates fall due to the fast depreciation rate of vehicles. The value of the vehicle falls faster than the balance on the loan, and so lenders are often unwilling to refinance.

How do Asset-Backed Securities work?

When consumers like you and I decide to take out a loan, our debt becomes an asset on the balance sheet of the lender. This lender may arrange to sell these assets to a financial institution, who then sets up aSpecial Purpose Vehicle (SPV)，一个获取这些资产，将它们包装成资产支持的安全性的实体，然后将其出售给机构投资者，例如对冲资金和Investment Banks.

The following video uploaded by WSO provides a brief explanation of what an SPV is

通常，单独的证券作为单独发行tranches, which are slices created from a pool of securities to subsequently sell to investors that have different characteristics, such as their risks, yields, and time to maturity.

资产支持的安全性通常将有3个司令，A级，B和C。

The video below provides a detailed explanation of what a tranche is

The Class A tranche, or thesenior tranche，是所有人中最大的一笔，并具有最高的信用评级，并且以这种方式结构化，因此它对机构投资者具有吸引力，因为它将具有投资等级的评级。B级和C批量的信用等级较低，这意味着他们支付更高的信用等级yield，由于风险增加。实际上，C级批量的信用评级可能很弱，以至于无法提供给投资者。在这种情况下，基于资产的安全性的发行人保留了C类批准并吸收损失。

What are the advantages of Asset Backed Securities?

ASBs provide investors with a plethora of advantages, and some of these advantages will be listed below.

• Issuing ABSs provide lenders the benefit of gaining new sources of funding through securitization, which may also remove risky loans from the institution's balance sheet
  
• ABSs provides great investment diversification for investors, as investing in the ABS market exposes you to many business sectors, such as home equity, student, and auto loans, as well as credit card receivables
  
• The senior tranche for ABSs have a very high credit quality, providing secure investment vehicles for institutional investors
  
• Asset Backed Securities offer higher yields than government bonds and mortgage-backed securities of comparable credit quality
  
• ABSs do not rely on the financial wellbeing of the intermediaries that issue these securities. Even if the financial institution that issued the ASBs were to go bankrupt, the investors would still receive payments, as the loans consist of a massive number of borrowers consistently making payments

What are the disadvantages of Asset Backed Securities?

Investing in ASBs, like any other financial instrument, carries certain risks that investors must address and align with their risk tolerance. Some of these risks include

• Prepayment risk, which occurs when borrowers choose to accelerate the payments for their loan and pay it off early by adding extra payments to reduce the outstanding principal on the loan. This can result in a lower yield for investors, shrinking the size of the assets held in the securities
• 还款风险当借款人决定以较低和更具吸引力的利率再融资以减少他们需要偿还的金额，从而导致投资者的收益率较低，这发生在这种情况下。
• Non-payment risk这是当借款人无法履行其财务义务并且不再能够付款时发生的情况。这种风险可能导致由于破产而失去贷款的未偿余额，并降低了投资者的收益率，大大收缩了发行的证券中持有的资产

Check out the video below for a great explanation on Asset-Backed Securities

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