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Securitization and Asset-Backed Instruments - Coggle Diagram
Securitization and Asset-Backed Instruments
Securitization
Fixed income security that bears interest
Created from the pooling of loans or receivables with periodic cash flows
Some examples are "MBS" and "ABS" securities
Multiple tranches with different risks and higher returns as the tranch is more risky.
Benefits
Provides portfolio diversification
Less correlated to traditional bonds and stocks
Liquid and transfarable
Enhanced rules to provide greater confidence to investors
Asset-Backed Securities (ABS)
Non traditional debt securities
Created from the pooling of non mortgage loans, such as auto, consumer or students loans.
Receivables like credit card receivables
sensitive to the US economy and consumption health
Benefits
Secured by collaterals
Backed by different types of loans to many individual borrowers
Less correlated to traditional fixed income sectors
Mortgage Backed Securities (MBS)
Non traditional debt securities
Created from the pooling of mortgage loans
Divided into
Agency MBS
Issue and guarantee by Ginnie Mae, Fannie Mae and Freddie Mac
Ginnie as a government entity and Fannie and Freddie as government sponsored enterprises
Non agency MBS
Issued by private financial institutions
Benefits
Agency MBS are AAA rated
Relatively less correlated to traditional fixed income sectors
Offers diversification to the portfolio
Disadvantage
Borrowers have an option to partially or fully prepay their mortgages, creating uncertainty around timing of the MBS cash flows
General Example
A lender or bank extend a credit to home buyers for example
Then, it is sold to an agency or private financial institutions, who issues MBS
Home buyers make their monthly payments
Then, this money is received by the bank
Then transfered to the MBS issuer, that will redisrtibute cash flows to MBS investors