Cash Flow Modeling For Asset Backed Securities

Asset-backed securities are securities whose income payments and values are derived from a specified pool of underlying assets. They consist of receivables other than mortgage loans. The securities are collateralized by a pool of assets such as leases, credit card debts, royalties or receivables.

Asset backed securities usually have three tranches which are a group of loans with similar characteristics. The tranches are divided into class A, B and C, with tranch A being the senior most and is usually the largest. Tranch A has a high investment rating and is therefore more attractive to investors.

Tranch B is of a lower credit quality than tranch A. Tranch C is the lower one of the two and is designed to absorb credit losses. It is mostly not sold to investors due to its poor credit quality. There are different types of asset backed securities;

  • Home loans
  • Auto loans
  • Credit card receivables
  • Student loans

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The cash flow modeling for Asset- Based Securities is used to generate projected collateral cash flows under a particular loss and delinquency scenario. For a cash flow modeling to be considered efficient it has to contain the following attributes;

  • The Asset-Based Security cash flow model has to have efficient coverage of asset classes.
  • The Asset-Based Security cash flow model should be accurate and true to facts.
  • The model should be transparent and all the details should be well documented.
  • The model should be easy to integrate into internal systems. It should also be easy to use and understand.
  • The model should have a high ability to adjust to assumptions. As most models are based on assumptive scenarios the model could change based on the current scenario.

The cash flow modeling for Asset – Backed securities is important in controlling chaos in the market trends and the forecasting of losses. For a free consultation please go to  https://www.mortgageauditsonline.com/

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