Key Difference – Asset Backed Securities vs Mortgage Backed Securities
Asset backed and mortgage backed securities are two types of investments where securities are pooled and sold to a group of investors. The structure of both are similar in nature and the key difference between asset backed securities and mortgage backed securities depends on the type of collateral (a pledge to secure a loan) used for securities. Asset backed securities are backed by securities such as various types of loans, receivables and leases while mortgage backed securities are collateralized by mortgages.
CONTENTS
1. Overview and Key Difference
2. What are Asset Backed Securities
3. What are Mortgage Backed Securities
4. Side by Side Comparison – Asset Backed Securities vs Mortgage Backed Securities
5. Summary
What are Asset Backed Securities?
Asset Backed Securities (ABS) are bonds and notes backed by various financial securities such as loans, leases or receivables, other than real estate or mortgage backed securities. When consumers borrow, these borrowings become assets for the company that issued the debt, most probably a bank or a consumer finance company.
The bank or the finance company (the party issuing the debt) can sell the above assets to a trust who in turn will issue bonds backed by assets it contains to investors. This process is named ‘securitization’ and this enables the trust to make the assets marketable. For investors, asset-backed securities are an alternative to investing in corporate debt.
E.g., If a consumer has taken out a home-equity loan which is securitized, the loan payments will be received by the investors in the trust since the trust has invested in the finance company
Common Types of Underlying Assets
Home-equity Loans
A loan taken out by the borrower using his or her home as collateral.
Leases
An agreement to rent a property owned by one party to another in return for periodic lease payments.
Auto Loans
A personal loan to purchase an automobile.
Credit Card Receivables
An asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors.
Student Loans
Type of loan granted for students to fulfil their higher education needs.
What are Mortgage Backed Securities?
Mortgage Backed Securities (MBS) are also a type of asset backed security collateralized by mortgages. These are also referred to as ‘mortgage pass through’. These are debt instruments that represent entitlements to the cash flows from pools of mortgage loans. An MBS can be bought or sold through a broker subjected to a minimum investment limit of $10,000. Mortgage backed securities can be issued by governments and corporations.The process of issuing the securities is similar to asset backed securities.
Types of Mortgage Backed Securities
- Pass-through participation certificates
Entitle the holder to a pro-rata share of all principal and interest payments made on the pool of loan assets
- Collateralized mortgage obligations or mortgage derivatives
Designed to protect investors from or expose investors to various types of risk
Figure 1: Mortgage Backed Securities carry different risks and returns
What is the difference between Asset Backed Securities and Mortgage Backed Securities?
Asset Backed Securities vs Mortgage Backed Securities |
|
| Asset backed securities are backed by securities such as loans, receivables and leases. | Mortgage backed securities are collateralized by mortgages. |
| Implications | |
| Asset based securities use a range of pooled assets such as loans, leases and receivables. | Mortgage backed securities are backed by mortgages. |
| Development | |
| Asset backed securities are a relatively new development compared to mortgage backed securities. | Mortgage backed security markets are well established. |
| Timeframe | |
| Asset backed securities are typically shorter in duration and more challenging when it comes to predicting cash flows. | Mortgage backed securities are comparatively less risky due to its longer time frame. |
Summary – Asset Backed Securities vs Mortgage Backed Securities
The difference between asset backed securities and mortgage backed securities are principally attributable to the difference in types of securities used as collateral. Assets based securities have a number of investment options compared to mortgage based securities; however, they carry varying degree of risks and returns which should be properly evaluated before making investment decisions.
Reference:
1. “Asset-Backed Security – ABS.” Investopedia. N.p., 26 June 2015. Web. 06 Mar. 2017.
2. “What Is an Asset-Backed Security? – TheStreet Definition.” TheStreet. N.p., n.d. Web. 06 Mar. 2017.
3. “Mortgage-Backed Security (MBS).” Investopedia. N.p., 07 Feb. 2017. Web. 06 Mar. 2017.
4. “Fast Answers.” SEC.gov | Mortgage-Backed Securities. N.p., 23 July 2010. Web. 06 Mar. 2017.
5. “Comparing Asset-Backed Securities (ABS) to Mortgage Backed Securities (MBS).” EBriefing Article. N.p., n.d. Web. 06 Mar. 2017.
Image Courtesy:
1. “Risk & Return For Investors” By Thomas Splettstoesser – Own work (Public Domain) via Commons Wikimedia