HousePro Realty, Inc.
Kristi Gonzalez, DRE #01877616, HousePro Realty, Inc.Phone: (858) 688-1802
Email: [email protected]

The Alphabet of Real Estate Investing: ABS & CDO

by Kristi Gonzalez, DRE #01877616 01/19/2020

Image by Ulrike Mai from Pixabay

If you're considering getting into the world of real estate investing, there are some basic terms that are important to understand. Buying and selling property is, of course, one way to invest, but there are other investments that offer favorable returns. However, it can sometimes be difficult to master the confusing alphabet soup of investment opportunity.

Packaged investment products include the Asset-Backed Security (ABS) and a Collateral Debt Obligation (CDO). In some ways, they are similar; each is typically bundled as a group investment for marketing purposes. Financial return is realized as payments are made by the pool of consumers included in the group. 

The ABS evolved historically, beginning in the 1980s, with the lender practice of bundling mortgage-backed securities for resale, primarily to other institutions. Today the practice continues, but mortgage debt is classified as a CDO, with specific real estate as the collateral. It is a specialty designation under the umbrella of asset-backed securities. The breakdown can be complex, and terms are sometimes confusing.

Financing that comprises CDO debt includes all the underlying characteristics of the ABS, in addition to the specialized assets of both commercial and residential Mortgage-Backed Security (MBS) or REIT (Real Estate Investment Trust) debt. A unique type of CDO that only includes mortgages is known as a CMO, referring to Collateralized Mortgage Obligation. 

Most investors really don't need to know more, but there are other designations that are commonly used:

  • A CLO is the term for Collateralized (Bank) Loan Obligation;
  • A CBO designates a Bond Obligation;
  • Credit-backed debt is sometimes referred to as synthetic CDO to distinguish it from cash-backed debt.

Various types of CDO debt are batched into three (or more) classes, known as tranches, with varying degrees of risk and return. Although the maturity level may be the same, an Equity Tranch investment offers the highest potential return but bears the lowest credit rating. A less-risky Senior Tranch boasts a higher credit rating, and the Mezzanine Tranch is in the middle.

Typically, an ABS investment package comprises credit card debt, student loan debt, home equity loans, auto loans, and large sum debt-repayment contracts for other goods, with no mortgages in the package. 

An investor in either an ABS or CDO earns a return, in part or in full, as the pool of debt is repaid by the individuals whose loans have been pooled. The risk of default is spread over the spectrum of loans, and investor risk is assessed, largely in proportion to the number and type of loans included in the package. 

These various types of investment packages are usually marketed only to institutions, rather than to individual investors, however there are ways for individual investors to purchase shares through the investment firm.

About the Author
Author

Kristi Gonzalez, DRE #01877616

I am the Broker of HousePro Realty, Inc.  My team serves all of San Diego County and we have had the opportunity in the past 20+ years to help numerous clients buy and sell homes.   

If you are selling a home,  we never charge any more than the negotiated commission.  If you are buying a home we never charge you any fees at all.  

Many brokerages now do, so always ask upfront if the company/agent you are considering using will be charging you any additional fees, such as transaction coordinator, admin or doc fees, etc.  

Our services include helping you sell your home for the best price, in the least amount of time, with process as smooth as possible, making sure you complete all required disclosures to avoid legal issues later.  

If you are  buying, we will help you find the right home, assist you in arranging financing, negotiate a good purchase price on your behalf, and will handle all the details of the transaction to ensure a smooth closing. 

When the time comes for you to purchase or sell a home, let us put  our 20+ years' experience to work for you.  We would appreciate the opportunity to represent you and  we look forward to the opportunity of becoming your trusted real estate resource.  

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Let me know how you were referred to my company and we will provide you with a set of Cutco Knives Value up to $200, at closing, if you list or purchase a home with HousePro Realty, Inc. representing you.

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Refer a client to my team and we will make a donation to Charity, in your name, when the home closes escrow.

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Attention all Military Veterans, Nurses, First Responders, Firefighters, and Law Enforcement officers. My team provides a reduction in commission if you list your home with us and closing cost credits if you purchase a home with my team representing you. Thank you all for your service to our country.

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