What are asset backed securities?
An asset back security is any security (ie, any investment vehicle) that is back by something physical, rather than just the promise to pay. The security is usually (but not always) fixed income. In the case of default on the asset-back security, creditors gets first claim on the asset. The asset often has a tangible, fungible value (eg, like a house, a car, a power plant project). Let’s take the mortage example. Let’s say you buy a house. You are the equity owner, but not the debt owner. In the business world, the debt owner gets paid first and the equity owner always get paid last. So you own the house, but the mortgage owner has the right to collect a stream of payments from you and the right to foreclose on your house if you don’t pay. The mortgage (which is backed by your house) is resold to another entity (eg, another bank or a quasi-government agency like Fannie Mae). The mortgages are sold to either lock in profits, reduce costs by not servicing your mortgage or to diversify. D
