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  1. #1
    Spotloan
    Guest

    Could someone explain this to me?

    Hi , i'm a undergrad student and i stumbled upon this paragraph of an article i'm suppose to read for my essay. I don't understand this whole para at all and i'm hoping someone could explain to me in layman terms. Thank you!

    "..this perception of asset-backed securities (ABS) was fuelled by a belief that house prices, the ultimate security underlying mortgages would continue to rise. Perceived safety was also enhanced because of the diversification of credit risk created by the large underlying pools of mortgages or other financial assets that backed up ABS, reinforced by high-quality ratings form investment rating agencies".

  2. #2
    Michaellal
    Guest

    Could someone explain this to me?

    "The ABS(Asset Backed Securities) is formed mainly to increase the ultimate safe Mortages and house prices other finance sources will be increased in our state so that investment rating also got increased ultimately". this is the meaning i come to know from this passage

  3. #3
    Senior Member
    Join Date
    Nov 2016
    Posts
    186

    Could someone explain this to me?

    An Asset Backed Security (ABS) is a security someone purchases that is backed by an asset (can be loans, cars, etc). Typically, ones backed by a mortgage are referred to as an MBS (mortgage backed security).

    As it relates to your question, an MBS is a way to 'pool' many mortgages into one security. If you purchase the MBS, you own the right to a portion of the income (principal and interest as outlined in the structure of the security) of the underlying mortgages as the homeowners pay their mortgage. In theory, the more mortgages that were in the 'pool,' the less impact and risk to the whole that any one individual person would default and not pay their mortgage. In a good and upward trending economy, massive numbers of defaults were not a consideration. This allowed rating agencies to give a higher credit rating to the pool as a whole. Also, given the faulty notion that home prices would increase forever into the future, if the MBS servicer had to foreclose on a homeowner and take possession of the property for nonpayment, then the chances seemed high that the house would be worth more than the loan/note and the MBS holder would end up profiting despite dealing with a foreclosure. Therefore, it seemed that an MBS could additionally warrant a higher credit rating.

    If you would like some additional information, then check out Wikipedia's website and search for "Asset-backed security."

  4. #4

    Could someone explain this to me?

    think it means that the mortgage providers took a risk in offering a high volume of mortgages based on the expectation of home prices increases and the fact that leverage was available form multiple sources making the asset back security business boom.

  5. #5

    Could someone explain this to me?

    think it means that the mortgage providers took a risk in offering a high volume of mortgages based on the expectation of home prices increases and the fact that leverage was available form multiple sources making the asset back security business boom.

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