What is an asset backed security (ABS)?

An asset-backed security ( ABS) is a security whose income payments, and hence value, are derived from and collateralized (or "backed") by a specified pool of underlying assets . The pool of assets is typically a group of small and illiquid assets which are unable to be sold individually.

Can a security be considered a 'asset backed security'?

The new rules provide that a security may be considered to be an "asset-backed security" even if the underlying asset pool has total delinquencies of up to 50% at the time of the proposed offering as long as the original asset pool does not include any "non-performing" assets.

How does securitization work?

To create asset-backed securities, loans and other forms of debt are pooled together in a process known as securitization. Securitization can take place with many types of loans, such as commercial and residential mortgages, auto loans, consumer credit card debt, and student loans.

What is a mortgage-backed security (MBS)?

A mortgage-backed security (MBS) is sometimes considered a type of ABS but is more often classified as a separate variety of investment, especially in the United States. Both operate in essentially the same way; the difference lies in the underlying assets in the portfolio.