Asset Backed Securities (ABS)

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27 Dec

What is Securitization?

Posted by Mohit Sewak Category: Finance, Securitization

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What is Securitization?

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Securitization is the process of issuing securities against mortgaged (asset backed) loans. Such securities can in turn be called:

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1. Asset Backed Securities (ABS), or

2. Asset Backed Obligations, or

3. Mortgage Backed Securities (MBS), or

4. Mortgage Backed Obligations, or

5. Collateralized Debt Obligations (CDO), or

6. Collateralized Debt Securities (CDS), or

7. Collateralized Loan Obligations (CLO), or

8. Collateralized Mortgage Obligations (CMO).

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Securitization is one of the methods to reduce the risk in such loans by risk pooling (a concept meaning that the average risk per entity reduces when a number of entities pool in to share a common, and fixed risk).

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Reasons for and advantages of Securitization:

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Securitizatuiion started back in early 70’s, in the US, with an intent to provide liquidity to the banks, so that they could provide more mortgage loans for buying assets/ houses, and hence increase the depth of the banking system, and also provide an opportunity to the common Americans to own a home.

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Any commercial bank (whether in United States or any part of the World), after reserving the assets required by all the regulations (as CRR- Cash Reserve Ratio, SLR- Statutory Liquidity Ratio, etc.) of the Central/ Federal Bank’s, is left with typically only 70%-75% of it’s total assets as loanable reserves. As a typical duration of a mortgage backed loan can range from a period of 10-30 years, it implies that a bank’s loanable money is locked for the next 30years say, and it can give no further loan for such a long period if it were to carry all the previously given loans into its books (as loan assets).

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Therefore Securitization helped banks to remove such loans from its books, so that it can give further loans to the needful, (while also complying with the percentage cash, and liquidity reserve ratios as required by the central/ federal bank) thus serving the twin purpose of:

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1. Increasing its own profit, by in effect, being able to give larger amount of loans than stipulated by the central bank:

2. Increasing the depth of Mortgage loan, and Real Estate/ Housing market in the country, by providing more loans (at a reasonable rate of interest) for such purpose.

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What is a Collateralized Debt Security (CDS) ?

Posted by Mohit Sewak Category: Finance, Securitization

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What is a Collateralized Debt Security (CDS) ?

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Going by the dictionary meanings, Collateralized Debt Security or a CDS, should have meant any loan, or security, taken against a collateral (anything to back up a loan, for eg. an asset as a mortgage).

But in structured finance (a sector of finance that was created to help transfer risk using complex legal and corporate entities), we take this definition a step forward to call any security formed/ derived (these come under financial derivatives) as a result of securitization of such underlying mortgage backed loans/ debts/ fixed-income assets as CDS’s.
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Therefore the technical definition of CDSs would be:

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Collateralized Debt Securities (CDSs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets.

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Some other names by which these securities are called are (There can be minute or no differences among such terms which we will be discussing later, but broadly speaking they all mean the same thing):

.

1. Asset Backed Securities (ABS), or

2. Asset Backed Obligations, or

3. Mortgage Backed Securities (MBS), or

4. Mortgage Backed Obligations, or

5. Collateralized Debt Securities (CDS), or

6. Collateralized Loan Obligations (CLO), or

7. Collateralized Mortgage Obligations (CMO).

.

These asset backed securities can be further re-securitized to form CDO² (CDO Squares), which in turn can be further re-re-securitized to form CDO³ (CDO Cubes), and so on. This is a complicated process and will be discussed in a separate post.

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What is an Asset Backed Obligation (ABO) ?

Posted by Mohit Sewak Category: Finance, Securitization

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.
.

What is an Asset Backed Obligation (ABO) ?

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.
.

Going by the dictionary meanings, Asset-Backed Obligation or an ABO, should have meant any loan, or security taken against any asset kept as a collateral (anything to back up a loan, for eg. a mortgage). But in structured finance (a sector of finance that was created to help transfer risk using complex legal and corporate entities), we take this definition a step forward to call any security formed/ derived (these come under financial derivatives) as a result of securitization of such underlying mortgage backed loans/ debts/ fixed-income assets as ABO’s.
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Therefore the technical definition of an ABO would be:

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An Asset-Backed Obligation is a security whose value and income payments are derived from and collateralized (or “backed”) by a specified pool of underlying assets.

This pool of assets is typically a group of small and illiquid assets that are unable to be sold individually.

.

Some other names by which these securities are called are (There can be minute or no differences among such terms which we will be discussing later, but broadly speaking they all mean the same thing):

.

1. Asset Backed Securities (ABS), or

2. Mortgage Backed Securities (MBS), or

3. Mortgage Backed Obligations, or

4. Collateralized Debt Obligations (CDO), or

5. Collateralized Debt Securities (CDS), or

6. Collateralized Loan Obligations (CLO), or

7. Collateralized Mortgage Obligations (CMO).

.

These asset backed securities can be further re-securitized to form CDO² (CDO Squares), which in turn can be further re-re-securitized to form CDO³ (CDO Cubes), and so on. This is a complicated process and will be discussed in a separate post.

.
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What is a Collateralized Loan Obligation (CLO) ?

Posted by Mohit Sewak Category: Finance, Securitization

.
.
.

What is a Collateralized Loan Obligation (CLO) ?

.
.
.

Going by the dictionary meanings, Collateralized Loan Obligations or a CLO, should have meant any loan taken against any collateral (anything to back up a loan, for eg. an asset as a mortgage).

But in structured finance (a sector of finance that was created to help transfer risk using complex legal and corporate entities), we take this definition a step forward to call any security formed/ derived (these come under financial derivatives) as a result of securitization of such underlying mortgage backed loans/ debts/ fixed-income assets as CLO’s.
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Therefore the technical definition of CLOs would be:

Collateralized Loan Obligations (CLOs) are a form of securitization where payments from multiple middle sized and large business loans are pooled together and passed on to different classes of owners in various tranches.

.

Some other names by which these securities are called are (There can be minute or no differences among such terms which we will be discussing later, but broadly speaking they all mean the same thing):

.

1. Asset Backed Securities (ABS), or

2. Asset Backed Obligations, or

3. Mortgage Backed Securities (MBS), or

4. Mortgage Backed Obligations, or

5. Collateralized Debt Obligations (CDO), or

6. Collateralized Debt Securities (CDS), or

7. Collateralized Mortgage Obligations (CMO).

.

These asset backed securities can be further re-securitized to form CDO² (CDO Squares), which in turn can be further re-re-securitized to form CDO³ (CDO Cubes), and so on. This is a complicated process and will be discussed in a separate post.

.
.

What is an Asset Backed Security (ABS) ?

Posted by Mohit Sewak Category: Finance, Securitization

.
.
.

What is an Asset Backed Security (ABS) ?

.
.
.

Going by the dictionary meanings, Asset-Backed Security or an ABS, should have meant any loan, or security taken against any asset kept as a collateral (anything to back up a loan, for eg. a mortgage). But in structured finance (a sector of finance that was created to help transfer risk using complex legal and corporate entities), we take this definition a step forward to call any security formed/ derived (these come under financial derivatives) as a result of securitization of such underlying mortgage backed loans/ debts/ fixed-income assets as ABS’s.
.

.

Therefore the technical definition of an ABS would be:

.

An Asset-Backed Security is a security whose value and income payments are derived from and collateralized (or “backed”) by a specified pool of underlying assets.

This pool of assets is typically a group of small and illiquid assets that are unable to be sold individually.

.

Some other names by which these securities are called are (There can be minute or no differences among such terms which we will be discussing later, but broadly speaking they all mean the same thing):

.

1. Asset Backed Obligations, or

2. Mortgage Backed Securities (MBS), or

3. Mortgage Backed Obligations, or

4. Collateralized Debt Obligations (CDO), or

5. Collateralized Debt Securities (CDS), or

6. Collateralized Loan Obligations (CLO), 0r

7. Collateralized Mortgage Obligations (CMO).

.

These asset backed securities can be further re-securitized to form CDO² (CDO Squares), which in turn can be further re-re-securitized to form CDO³ (CDO Cubes), and so on. This is a complicated process and will be discussed in a separate post.

.
.

What is a Collatralized Debt Obligation (CDO) ?

Posted by Mohit Sewak Category: Securitization

.
.
.

What is a Collateralized Debt Obligation (CDO) ?

.
.
.

Going by the dictionary meanings, Collateralized Debt Obligations or a CDO, should have meant any loan taken against any collateral (anything to back up a loan, for eg. an asset as a mortgage).

But in structured finance (a sector of finance that was created to help transfer risk using complex legal and corporate entities), we take this definition a step forward to call any security formed/ derived (these come under financial derivatives) as a result of securitization of such underlying mortgage backed loans/ debts/ fixed-income assets as CDO’s.
.

Therefore the technical definition of CDOs would be:

Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets.

.

Some other names by which these securities are called are (There can be minute or no differences among such terms which we will be discussing later, but broadly speaking they all mean the same thing):

.

1. Asset Backed Securities (ABS), or

2. Asset Backed Obligations, or

3. Mortgage Backed Securities (MBS), or

4. Mortgage Backed Obligations, or

5. Collateralized Debt Securities (CDS), or

6. Collateralized Loan Obligations (CLO), or

7. Collateralized Mortgage Obligations (CMO).

.

These asset backed securities can be further re-securitized to form CDO² (CDO Squares), which in turn can be further re-re-securitized to form CDO³ (CDO Cubes), and so on. This is a complicated process and will be discussed in a separate post.

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Mohit Sewak

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What is Securitization?

What is Securitization?

Reasons for and advantages of Securitization:

Other Posts Related to Securitization:

What is a Collateralized Debt Security (CDS) ?

What is a Collateralized Debt Security (CDS) ?

Other Posts Related to Securitization:

What is an Asset Backed Obligation (ABO) ?

What is an Asset Backed Obligation (ABO) ?

Other Posts Related to Securitization:

What is a Collateralized Loan Obligation (CLO) ?

What is a Collateralized Loan Obligation (CLO) ?

Other Posts Related to Securitization:

What is an Asset Backed Security (ABS) ?

What is an Asset Backed Security (ABS) ?

Other Posts Related to Securitization:

What is a Collatralized Debt Obligation (CDO) ?

What is a Collateralized Debt Obligation (CDO) ?

Other Posts Related to Securitization: