The difference between asset-backed securities and mortgage-backed securities

mortgage securities

Asset-backed securities and mortgage-backed securities are two types of investments that pool securities** to a group of investors. The structures of the two are similar, and the main difference between asset-backed securities and mortgage-backed securities depends on the type of collateral (the pledge that secures the loan) used for the securities. Asset-backed securities are backed by securities of various types of loans, receivables, and leases, while mortgage-backed securities are backed by mortgage loans.

What are asset-backed securities?

Asset-backed securities (ABS) are bonds and notes backed by a variety of financial securities such as loans, leases, or receivables, excluding real estate or mortgage-backed securities. When consumers borrow, those borrowings become the assets of the company that issued the debt, most likely a bank or consumer finance company.

The bank or financial company (the party that issued the debt) can ******** the above assets to the trust company, which in turn will issue bonds to investors secured by the assets it contains. This process, known as “securitization,” allows the trust to make the assets marketable. For investors, asset-backed securities are an alternative to investing in corporate bonds.

E. For example, if a consumer purchases a securitized home equity loan, the loan payment will be received by the investor in the trust company because the trust company has invested in the financial company

Common types of underlying assets

home equity loan

A loan where a borrower uses his or her house as collateral.


An agreement to rent out property owned by one party to another party in exchange for regular rent.

Car loan

Personal loan for a car purchase.

Credit card receivables

The name of the asset that applies to all debts, unsettled transactions, or other monetary debts owed by the debtor to the company.

Student loan

Types of loans issued to meet students’ post-secondary needs.

What are mortgage-backed securities?

Mortgage-backed securities (MBS) are also asset-backed securities backed by mortgages. These are also known as “mortgage pass-throughs.” These are debt instruments that represent the right to cash flow from the mortgage pool. MBS can be bought and sold through brokers with a minimum investment of $10,000. Mortgage securities can be owned by ** and companies. The process of issuing securities is similar to asset-backed securities.

Types of Mortgage Securities

  • Pass-through Certificate of Participation

Entitles holders to a pro-rata share of all principal and interest paid in the loan pool

  • Mortgage Loan Debt or Mortgage Derivatives

Designed to protect investors from or expose investors to various risks

Figure 1: Mortgage securities have different risks and rewards

The difference between asset-backed securities and mortgage-backed securities

asset-backed securities and mortgage-backed securities

Asset-backed securities are backed by securities such as loans, receivables, and leases. Mortgage securities are secured by mortgage loans.


Asset-based securities use a collection of assets such as loans, leases, and receivables. Mortgage securities are secured by mortgage loans.


Asset-backed securities are a relatively new development compared to mortgage-backed securities. The mortgage-backed securities market has been established.


Asset-backed securities typically have shorter maturities and are more challenging to forecast cash flow. Mortgage-backed securities are relatively less risky due to their longer duration.

Summary – asset-backed securities vs. mortgage-backed securities

The difference between asset-backed securities and mortgage-backed securities is mainly due to the different types of securities used as collateral. Asset-based securities have many investment options compared to mortgage-backed securities; however, they have varying degrees of risk and reward that should be properly assessed before making an investment decision.

By aamritri

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