Of the following assets, which are most commonly used as collateral for asset-backed securities? a. First-lien Agency-conforming residential mortgage loans. b. Second-lien home equity loans. c. Consumer demand deposit account balances. d. Commercial real estate construction loans. Choice “b” is correct. Second-lien home equity loans are commonly used as collateral for asset-backed securities. Choice “a” is incorrect. First-lien Agency-conforming residential mortgage loans are typically used as collateral for MBS securities issued by FNMA and FHLMC not for asset-backed securities. Choice “c” is incorrect. Consumer demand deposits are bank liabilities, not assets, and are not used as collateral for asset-backed securities. Choice “d” is incorrect. While commercial real estate construction loans could in theory be used as collateral for an asset-backed security, they are not as common a form of collateral as Second-line home equity loans. Why is choice “a” incorrect? Aren’t “MBS securities issued by FNMA and FHLMC” a subset of the broader category of “Asset backed securites”. In fact, aren’t they the largest subset, making it the most commonly used collateral for asset-backed securities?
As a buyer of asset-backed securities for nearly a decade and a half, I “get” what this question was driving at and would have answered “B”. Technically speaking, MBS could be considered a sub-set of ABS. However, practically speaking, MBS were “invented” and broadly developed before non-mortgage backed securities were. So therefore, the industry tends to refer to conventional MBS and ABS as separate categories of investments (not overlapping ones – at least not with respect to conforming first lien MBS). Go to any ABS conference and you’ll see lot’s of asset classes there – agency MBS will not be one. So, now that you understand how / why the industry thinks about this stuff, move one and don’t’ fret because this sort of “trick” is generally NOT how the CFAI tries to score points on the exam. I don’t think a question like this would make it through the pre or post exam vetting process for the technical reasons you point out.
Thank you for your response