Asset-backed securities

This chapter investigates the mechanics of the process of origination, the benefits to investors, and the sources of relative value of asset-backed securities (ABS). After providing an overview of why and how pools of unencumbered assets (often, loans) may be pooled into special legal entities (such as trusts) that are isolated from the potential bankruptcy proceedings that may involve the issuer of the asset, we proceed to explore the cash flow structure that are typical of securitization as it applies to ABS. Special attention is given to the role played by the rating process in determining the value of ABS and hence to credit enhancement mechanisms and the typical rules of allocation of default losses. The second part of the chapter is devoted to a detailed analysis of the key economic features of the most important categories of ABS, namely, auto loan, credit card, student loan, and residential ABS.