Page 227 - A Canuck's Guide to Financial Literacy 2020

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Asset Backed Securities

Asset backed securities are complex investments that are backed by an underlying financial
asset. These financial assets are a group of illiquid assets which are unable to be sold
individually. Common asset backed securities include credit card loans, student loans, auto
loans, home equity loans, etc. Mortgage loans are excluded and are not considered asset
backed securities as they can be packaged and sold as a “mortgage-backed security.”

Formation of Asset Backed Securities

Asset backed securities or ABS are considered fixed income instruments that are backed by
underlying financial assets such as:

▪ Credit Card Loans,
▪ Home Equity Loans
▪ Auto Loans
▪ Student Loans

Asset backed securities differ in comparison to bonds as their creditworthiness depends on
the paying ability of the originator of the loan and not on the issuer itself.

Securitization Process

Through the process of securitization, institutions such as banks, credit card providers, auto
and consumer finance companies pool the outstanding loans into one group for the purpose
of turning them into a marketable security. These pools of securities are sold to a special
purpose vehicle (SPV) often a corporation, whose goal is to buy the assets and continue the
securitization process. The corporation would in turn sell the loans to a trust company who
re-packages them as interest bearing securities and issues them to the general market.