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The common understanding of an asset-based debt is a loan meant to be repaid with interest, over time, and backed by a physical asset such as a building or a car. The asset serves as collateral that can be claimed by the lender in case of borrower default.
An Asset-Based Security (ABS), however, in investment terminology, is somewhat different.
Even though the common understanding of an Asset-Backed Security (ABS) might be a loan that is based on an actual asset, such as a home or an automobile, that is only partially the case in investment terminology. By definition, the ABS represents a pool of debt -- usually a group of individual loans -- that can include any type of debt other than mortgages. It may include loans that are backed by real property, such as equipment, land, buildings, or business inventory, but not necessarily.
Mortgages are specifically excluded and classed separately today. The ABS evolved from the mortgage-backed securities that were first introduced in the 1980s, but a debt secured by a mortgage is today known as Collateralized Debt Obligation (CDO). To make it more confusing, a CDO is a specific type of ABS.
An ABS represents other types of debt. Liability might be associated with an automobile loan, student loan debt, credit card debt, home equity loan or other types of loan debt that are to be repaid, with interest, over a specified period of time. Investors in asset-based securities assume the risk; the anticipation is that payment of outstanding principal and interest will be repaid as scheduled, so that investors will earn a reasonable rate of return. The risk is that borrowers may default on the loans, or that a collection process will delay repayment and involve unexpected costs.
The relative risk and anticipated return depends on the way such loans are packaged and sold. And the packaging depends in part on the reasons an original lender has for wanting to transfer the liability.
The original lender, often a small bank, credit union or other type of funding agency, will "sell the paper" as part of a package to a larger investor. This is accomplished in many ways and for a variety of reasons. Sometimes, it is to better the creditor's financial position or to comply with government rules regarding loan percentages and cash reserves. Such a sale may also be an attempt to dispose of non-performing loans by transferring the burden of collections to another entity.
Investment institutions package loans based on risk assessment. The loans are separated into three classes known as tranches. Risk and potential return are proportional: A higher-risk tranch also promises higher yield, while lower risk invariably holds potential for a lower interest rate return on investment.
Working with a knowledgeable financial advisor is recommended if you are interested in ABS investing. Almost any brokerage firm can be used for such investment.
Susan Shuxian Hu has been a dedicated realtor serving in Silicon Valley since 2010. With great passion, outstanding negotiation skills and due diligence, she has helped many buyers and sellers in their real estate needs. Living in West San Jose for more than 14 years, she has broad knowledge in Cupertino, West San Jose, Los Altos and Saratoga. She has enormous patience working with buyers and never tired of showing all possible properties that may fit client’s needs. Clients appreciate her best service to their satisfaction. She specialized in luxurious real estate purchase in Los Altos, Cupertino, Saratoga and Palo Alto. She also helped friend and past client’s referral working in San Francisco, Foster City and far reached Bay Area.
Susan Shuxian Hu was graduated in East China Normal University in Shanghai with bachelor and master degrees in Bio science. She came to US in 1989 and earned her Ph.D. in Molecular Genetics in Texas A&M University in 1996. After one year of postdoc in Southern Florida University in Tampa, she moved back to Orlando with her family and started working in Lucent Technologies. In 2002, Susan moved to California, Silicon Valley joined a start-up company. Since then she worked in high tech Corporation till 2009. Driven by her dream job pursuing, she found her passion working in sales by helping people in real estate after one year of education in De Anza business and real estate law study. Since then, she has been serving many people in Bay Area for their real estate needs.
With bilingual advantage, she has been actively working with Chinese immigrants as well as local engineers and residents. With rich high tech background and connection with Chinese community, Susan has served in luxurious real estate in last a couple of years.