Asset Backed Securities vs Mortgage Backed Securities Key Differences Explained
Asset Backed Securities (ABS) are bonds backed by pooled cash-flows from car loans, credit cards, or other receivables. Mortgage Backed Securities (MBS) are bonds backed by pools of home mortgages. Both slice cash-flows into tradable pieces, but the collateral differs.
Investors often lump them together because both “securitize” loans and offer steady payments. The confusion grows when brokers use “mortgage” and “asset” interchangeably, making MBS sound like just another ABS flavor.
Key Differences
ABS collateral is diverse—autos, student loans, even royalties. MBS collateral is strictly home loans. ABS may carry more varied prepayment speeds, while MBS is sensitive to housing-market shifts and homeowner behavior.
Which One Should You Choose?
If you want exposure to consumer credit cycles, consider ABS. If you prefer housing-market-linked cash-flows, lean toward MBS. Always weigh liquidity and your risk tolerance first.
Examples and Daily Life
Your car loan could be inside an ABS pool funding another driver’s purchase. Your neighbor’s mortgage might sit in an MBS that your retirement fund owns.
Is ABS riskier than MBS?
Risk depends on the underlying loans and structure; neither is inherently safer.
Can I buy either security directly?
Most individuals access them through bond funds or ETFs, not single issues.
Why do brokers group them together?
Both are securitized fixed-income products, so platforms often list them under the same menu.