Asset Backed Securities vs Mortgage Backed Securities: Which is the Better Investment in 2025?

Calibraint

Author

May 8, 2025

Introduction

In today’s volatile economic environment, comparing asset backed securities vs mortgage backed securities have become a key comparison for investors seeking stability, predictable income, and diversification. As we move through 2025, fixed-income investments remain attractive, but understanding how ABS and MBS differ — and which offers better value — is more important than ever.

Both asset backed securities and mortgage backed securities provide opportunities to earn income through structured finance, yet they differ in underlying assets, risk exposure, yield potential, and market behavior. According to a report by Fitch Ratings, the outlook for structured finance is cautiously optimistic with ABS providing diversification benefits, while MBS remains sensitive to interest rate shifts and housing trends.

For investors and financial professionals alike, evaluating the nuances of ABS vs MBS is critical to building a robust fixed-income portfolio. This blog breaks down what are asset backed securities and what are mortgage backed securities, explores their risk-return profiles, and helps you decide where to place your capital in 2025.

What Are Asset Backed Securities?

Asset backed securities (ABS) are investment products backed by pools of non-mortgage financial assets such as auto loans, credit card debt, student loans, and equipment leases. Investors in ABS receive payments generated by the cash flows of these underlying assets.

Key Features of ABS Securities:

Diverse Collateral: ABS securities are based on non-real estate assets, offering exposure to a broad range of financial obligations like auto loans, student debt, and credit card receivables. This variety reduces dependence on any single asset class and enhances diversification. Investors benefit from a more balanced portfolio structure. Such diversification makes ABS attractive in mixed-market conditions.

Tranching: These instruments are issued in multiple layers, or “tranches,” each carrying different levels of risk and potential return. Senior tranches get paid first and carry lower risk, while subordinate tranches offer higher yields in exchange for greater exposure. This layered structure allows investors to choose based on their risk tolerance. Tranching also helps allocate default risk across the structure.

Credit Enhancement: Issuers of ABS often incorporate safeguards like overcollateralization (adding extra assets), reserve accounts, or third-party guarantees to boost investor confidence. These mechanisms aim to protect investors from defaults in the underlying assets. Enhanced creditworthiness can make ABS more attractive to conservative investors. It also helps the instruments secure better credit ratings in the market.

Types of Asset Backed Securities:

Auto Loan ABS: These are backed by payments on automobile loans, offering consistent cash flow as borrowers repay their car financing. They are popular for short-to-medium-term investors seeking predictable returns.
Credit Card ABS: Based on revolving credit card balances, these securities provide income from monthly interest and principal payments. Their performance often reflects consumer spending behavior and credit quality.
Student Loan ABS: These securities are backed by repayments from student loans, often featuring longer maturities. They appeal to investors looking for extended income duration despite possible repayment delays.
Equipment Lease ABS: Derived from lease payments on business equipment, they offer returns tied to commercial leasing activity. These ABS types are attractive in industrial sectors with high capital expenditure.

Growth Outlook in 2025:

The global ABS securities market was valued at over $2.5 trillion in 2023 and continues to grow as investors seek alternatives to traditional fixed-income options. The appeal of consistent returns, especially in higher interest rate environments, supports increased issuance and demand.

ABS are ideal for investors aiming for steady income streams from consumer or business credit portfolios, particularly those who want to diversify beyond real estate exposure.

What Are Mortgage Backed Securities?

Mortgage backed securities (MBS) are bonds secured by pools of residential or commercial mortgages. The underlying borrowers repay their mortgage loans, and those payments (principal and interest) are passed through to MBS investors.

Types of Mortgage Backed Securities:

Agency MBS: Issued by government-sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac, or Ginnie Mae. These are perceived as safer investments.
Non-Agency MBS: Issued by private financial institutions and not guaranteed by the federal government, offering higher yields but greater risk.

Key Features:

Pass-through Structure: MBS are typically structured as pass-through securities, where investors receive a proportional share of the monthly cash flow generated by the underlying mortgage pool. These cash flows include both principal and interest payments from borrowers. The regularity of these payments supports predictable income. This structure makes MBS especially appealing to income-focused investors.
Credit Ratings: Mortgage backed securities issued by government-sponsored enterprises such as Fannie Mae or Freddie Mac usually hold high credit ratings. These ratings stem from the perceived or explicit backing of the federal government. The high ratings make agency MBS a safer investment option. Investors often choose them for low-risk exposure to real estate.
Interest Rate Sensitivity: MBS are highly sensitive to fluctuations in interest rates, which directly impact their pricing and returns. When rates fall, homeowners tend to refinance, resulting in early loan repayments and altered cash flow. When rates rise, the value of existing MBS may decline. Understanding this sensitivity is crucial for effective portfolio management.

Risk Factors in 2025:

Prepayment Risk: Borrowers may refinance or repay their mortgage loans earlier than expected, especially during periods of falling interest rates. This disrupts the projected cash flow for investors and can reduce overall returns. Prepayment also limits the reinvestment potential at equivalent yields. Managing this risk requires careful selection of MBS types and timing.
Interest Rate Risk: Changes in interest rates have a direct impact on MBS valuations. As rates rise, the value of existing MBS tends to fall due to lower attractiveness compared to newer issues. Conversely, declining rates can increase prepayment rates, complicating income predictability. Interest rate outlooks should be a core consideration when evaluating MBS portfolios.

Despite these risks, mortgage backed securities continue to be essential tools for income-focused investors and institutions. Their ability to generate consistent payments and fit into diverse bond strategies makes them relevant, even in shifting macroeconomic climates.

Why Asset Backed Securities vs Mortgage Backed Securities Matters in 2025

In 2025, the question of asset backed securities vs mortgage backed securities is more than just a technical distinction — it’s a strategic choice for investors navigating a landscape shaped by inflationary pressures, shifting interest rates, and evolving credit markets. Understanding this comparison allows portfolio managers and individual investors to assess where their capital is best positioned for risk-adjusted returns, stability, and growth. As fixed-income instruments regain traction, choosing the right security type can make a significant difference in portfolio resilience and yield performance.

Asset Backed Securities vs Mortgage Backed Securities: Key Structural Differences

In this section, we break down the key differences between asset backed securities vs mortgage backed securities, helping investors better understand their structure, performance, and risk exposure.

In 2025, understanding mortgage and asset backed securities structures is critical as rate volatility and credit conditions evolve. ABS offer flexibility and sector diversity, while MBS tend to align with real estate cycles.

Asset Backed Securities vs Mortgage Backed Securities: Risk-Return Profiles in 2025

Both ABS and MBS provide investors with opportunities to earn passive income, but their risk-return trade-offs vary. This section dives into the investment performance, liquidity, and volatility of asset backed securities vs mortgage backed securities.

ABS Investment Insights:

Pros:

Broader diversification: ABS allow exposure to varied asset classes like auto loans, student debt, and leases. This variety helps reduce dependence on a single sector.
Higher yields via subordinate tranches: Investors willing to take on more risk in junior tranches can benefit from enhanced returns. These yields compensate for the increased exposure to defaults.
Less tied to interest rate movements: ABS typically have lower duration compared to MBS, making them less sensitive to rate shifts. This can offer stability in a rising rate environment.

Cons:

More exposure to borrower creditworthiness: Since ABS aren’t backed by real estate, repayment depends on consumer debt performance. Poor credit behavior can affect returns.
Complex risk modeling: The structure of ABS requires detailed analysis to assess different tranches. This complexity may challenge less-experienced investors.
Lower transparency in some structures: Not all ABS issuances provide complete visibility into underlying assets. This lack of clarity may heighten perceived investment risk.

MBS Investment Insights:

Pros:

Steady income from mortgage payments: Investors receive regular principal and interest payments, supporting consistent cash flow. This makes MBS ideal for long-term income seekers.
Agency MBS are backed by the government: Securities issued by GSEs like Fannie Mae carry implicit or explicit guarantees. This government support enhances credit quality.
Greater liquidity in the secondary market: MBS benefit from active trading and market depth. Liquidity improves pricing and exit opportunities.

Cons:

High interest rate sensitivity: MBS prices fluctuate significantly with interest rate changes. Rate hikes typically reduce MBS valuations.
Early repayment disrupts income stream: Falling rates encourage mortgage refinancing, leading to unexpected cash flow changes. This affects yield predictability.
Greater exposure to housing market trends: MBS performance closely follows real estate health and borrower behavior. Economic downturns may weaken housing-related securities.

In terms of yield, non-agency MBS may outperform ABS, but at the cost of higher risk and volatility. Investors must weigh their risk tolerance against potential returns.

Which is the Better Investment in 2025?

When it comes to asset backed securities vs mortgage backed securities, the answer depends on your investment goals:

Choose ABS If:

You prefer diversified exposure beyond real estate: ABS offer access to multiple consumer and commercial asset types. This can reduce correlation with housing market downturns.
You want moderate interest rate sensitivity: The shorter durations of ABS make them more resilient to interest rate hikes. This can safeguard principal better in rising rate environments.
You’re seeking yield through structured tranches: ABS provide tiered risk-return opportunities via tranches. Investors can match their risk appetite to specific investment layers.

Choose MBS If:

You’re seeking long-term, stable income: MBS deliver regular mortgage payments over extended terms. This makes them attractive for income-focused portfolios.
You want exposure to real estate with government-backed safety: Agency MBS come with federal support that cushions credit risk. This adds a layer of security during economic stress.
You’re experienced with rate-driven instruments: Understanding how interest rate shifts affect prepayments and pricing is vital. MBS favor investors with macroeconomic insight.

ABS securities may outperform in a stable or rising rate environment, while MBS shine when interest rates fall or housing markets boom.

Expert Forecast: Where Are Institutional Investors Leaning?

In 2025, institutional demand for mortgage and asset backed securities remains robust. Portfolio managers are:

Rotating into ABS for higher-yielding opportunities with reduced duration risk
Reentering MBS as spreads widen, especially with reduced Fed involvement
Balancing exposure across types of mortgage backed securities and types of asset backed securities for risk-adjusted returns

As financial instruments like ABS and MBS evolve, enterprises are increasingly exploring technologies like blockchain for enhanced transparency and auditability.

Conclusion

In conclusion, the ongoing comparison of asset backed securities vs mortgage backed securities in 2025 underscores a key investing principle — aligning structured finance choices with evolving market dynamics, income goals, and risk tolerance.

The debate over asset backed securities vs mortgage backed securities continues into 2025 with renewed relevance. While both offer attractive features, your ideal pick will depend on your income needs, risk appetite, and market view.

📈 For yield seekers: Non-agency MBS or lower-rated ABS tranches may suit you.
🔒 For safety: Agency MBS or senior ABS tranches can offer lower risk.
📊 For diversification: ABS lets you move beyond housing into broader consumer credit.

Ultimately, a blended approach — combining ABS securities and mortgage backed securities — might offer the best balance for modern portfolios.

🚀 Ready to navigate the world of structured finance with expert guidance? Connect with Calibraint to explore custom fintech solutions that simplify ABS and MBS investments for your business or clients.