Subject 7. Non-Mortgage Asset-Backed Securities
#basic-concepts #cfa #cfa-level-1 #fixed-income #reading-55-introduction-to-asset-backed-securities
Asset-backed securities are backed by a wide range of asset types.
Auto Loan Receivable-Backed Securities
- Underlying collaterals: amortizing auto loans and lease receivable
- Prepayment risk due to repossession, early payoff, insurance settlement from wreck, sale of vehicle, or refinancing (rare)
- Credit enhancement: senior/subordinated structure, reserve account, overcollateralization, excess interest on receivables
Credit Card Receivable-Backed Securities
- Collateral is non-amortizing loans
- Fixed or floating interest rates
- The lockout period is the amount of time that principal repayments are reinvested in new receivables rather than returned to security holders. During this period the cash flow paid out to security holders is based only on finance charges collected and fees. The principal amortizing period is from the end of the lockout period through the end.
- Early amortization is a type of credit enhancement. It is usually triggered when there is a sudden increase in delinquencies in the underlying loans or when excess spread, the issuer's net profit after deducting servicing fees, charge-offs and other costs, falls below an acceptable level.
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