Asset sales involve selling bank receivables, such as auto loans, mortgages, and credit card receivables, to outside investors. They can be whole loans, entire loan groups, or securitized loans. Asset sales reduce a bank’s risk and improve its capital ratio. They can also refer to transfers of ownership from the government or business sales.
Asset sales are transactions in which bank receivables are sold to an outside investor. These receivables, which typically include auto loans, residential mortgages, and credit card receivables, may be entire loans, entire groups of loans, or securitized loans. An account receivable is an amount of money owed by a person or business, usually in the form of cash.
Whole loans are loans sold in their entirety. In the case of a mortgage loan, for example, an investor buys all the rights and responsibilities of the mortgage contract, and the seller has no continuing financial interest. However, it is common for the seller to be paid a fee if he continues to service the loan by collecting principal and interest payments. Entire loan groups are similar, except that the buyer purchases an undivided interest in multiple mortgage loans, rather than just a portion of the loans.
Securitization is the process by which a number of assets are combined into a single package, or security, which is then marketed for sale to individual investors or depository institutions. These investors may include commercial banks, credit unions, savings and loan associations, mutual savings banks, and federal savings banks. One advantage of bundling and selling receivables is that it reduces a bank’s risk of not being repaid. This generally improves the bank’s capital ratio.
A key concept in selling assets is that they have no resources. This means that the party selling the assets does not retain the right or ability to repurchase any part of the assets after the sale has been completed. In cases where the buyer has recourse, the Financial Accounting Standards Board has ruled that this is considered financing rather than a sale, and the accounting rules are significantly different.
Asset sales also refer to transfers of ownership to a private sector company or individual from the government. In general, the price of this type of sale is established by legislation or by executive order. In either case, once this type of asset sale has been finalized, the government retains no legal right to manage or supervise the asset.
Business sales are also sometimes handled as asset sales. A corporation or limited liability company (LLC) may, for example, sell its assets, such as accounts receivable, inventory, real estate, furniture, or equipment, but retain ownership of its stock or membership interests. This differs from an entity sale where a buyer buys the shares or membership interests in the company.
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