Asset Backed

In some cases the lenders recourse to particular assets is quite explicit.
In the case of securitization the securitized assets (eg loans and mortgages) are separated from the originator and placed in a special purpose vehicle.
Bonds are then issued with payments secured by and paid out from the underlying pool of assets and its income.
Default by the originator should be irrelavant to bond holders since they are only concerned about the payments on the underlying assets.

An asset backed security is a bond whose value and income payments are derived from and backed by a specified pool of underlying assets
The pool is created from a combination of assets (residential mortgage loands, commercial property loans, student loans)
This process is called securitisation and it creates a security backed by these assets

After the bank pools all these assets together (it can, but not always) then sell these on to a special purpose vehicle (SPV).
The SPV holds the loans and mortgages as assets and issues the ABS bonds.
The bank cannot access these assets if it runs into financial difficulty The investors have some protection because they are not exposed to the default risk of the bank or the country of issuance.

Mortgage backed securities can be divided into two types:
Mortgage backed securities are groups of home mortgages that are packaged together and sold as a single security

Agency - these are created by one of the three quasi-government agencies: GNMA (Freddie), FNMA (Fannie) or FHLMC - the risk of default is neglible

Non Agency - (or private label) contain credit risk and are not backed by the government

Should the issuer not meet their obligations, the collateral can be liquidated.
A covered bond (or pfandbrief) is a particular form of secured bond issued by financial institutions.


  • double protection - claim against the issuer, preferential claim over the pool of assets

  • yield pickup

  • high liquidity

  • a form of diversification

These are dt securities backed by cash flows from mortgage or public sector loans.
They are similar to asset backed securities
Covered bond assets remain on the issuers balance sheet
A covered bond is a corporate bond that secures or "covers" the bond if the originator (usually a financial institution) becomes solvent.
The large majority of coporate bonds are not covered.

A covered bond (or Pfandbrief) is a particular form of secured bond
Covered bonds have a long history in Germany and Denmark
Specific documentation and legislation usually exist to ring fence assets (particularly mortgages) thereby giving priority to covered bondholders in the event of a default

These are bonds collaterized by commercial and/or residential mortgages and/or public sector assets

covered bonds are similar in some ways to asset-backed securities, however the pool of assets is not placed in a special purpose vehicle but instead remains on the balance sheet of the issuer.

German market is the biggest for covered bonds
They have also grown in Spain, UK and Ireland.

Asset backed bonds are issued in a number of tranches - related securities from the same issuer - each of which pays a different fixed or floating coupon.

Agency Mortgage Backed Bonds

Also known as pass through securities
These bonds represent an undivided interest in a pool of mortgages.
The mortgage backed bond holders receive interest and principal which are the pass through mortgage payments of the borrowers to the government agency.


The term applied to the pooling and packaging of loans into marketable securities
This type of bond is generated from a variety of loan types:
1) MBS - mortgage (residential)
2) ABS - asset (credit card / loan)

Mortgage Backed Securities
In the US is has been the custom for many years to bundle up mortgages and use them as the backing security for Mortgage Bonds
The UK is Europe's biggest market for mortgage backed bonds

Securitisation of Assets
The mortgage bond is just one example of taking the stream of principal and interest payments from an asset and converting it into a security hence the phrase "securisation of assets"

© 2023 Better Solutions Limited. All Rights Reserved. © 2023 Better Solutions Limited TopNext