Asset backed securities (ABS) are bonds that represent pools of loans of similar types, duration and interest rates. Unlike MBS (mortgage backed securities), asset backed securities are usually backed by non-mortgage based assets. The benefits of asset backed securities for the finance company include raising capital, and removing the loans from its balance sheet, so other loans can be issued.. It also gives investors a diversified investment in a pool of loans which can be more appealing than a standard fixed income investment or corporate bond. Nothing changes for the original debtors (recipient of the auto loan, residential loan, student loan, etc.) They still make payments on their loans, but the payments now go to the investors instead of the financing company.
The majority of these "pools" consist of:
- Auto loans and leases
- Residential Mortgages
- Credit Tenant Leases
- Consumer and business installment receivables
- Commercial Mortgages
- Bank and Financial Assets
- Equipment leases
- Student loans
- Specialized Assets
What are the benefits of using asset backed financing?
- Original lenders recover cash quickly, enabling them to make more loans
- It improves liquidity as well as balance sheet ratios while also reducing interest expense
- The originator of the receivables usually continues to service the assets and collect the payments
- Funding can be structured to be either fixed or floating