Asset sales are transactions where bank receivables are sold to a third-party investor. These receivables, typically comprised of automobile loans, residential mortgages, and credit card receivables, can be whole loans, whole pools of loans, or securitized loans. A receivable is an amount of money due from a person or company, 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 purchases all of the rights and responsibilities of the mortgage contract, and there is no ongoing financial participation by the seller. It is common, however, for the seller to be paid a fee if it continues to service the loan by collecting principal and interest payments. Whole pools of loans are similar, except the buyer purchases an undivided interest in several mortgage loans, rather than just a portion of the loans.
Securitization is the process through which a number of assets are combined into a single package, or security, which is then marketed for sale to individual investors or to depository institutions. These investors can include commercial banks, credit unions, savings and loan associations, mutual savings banks, and federal savings banks. An advantage of packaging and selling receivables is that it reduces a bank's risk of not being repaid. This typically improves the bank's capital ratio.
A key concept in asset sales is that they are non-recourse. This means the party selling the assets retains no right or ability to repurchase any portion of the assets once the sale has been finalized. 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. Generally, the price for this type of sale is set either through legislation or through an executive order. Regardless, once this type of asset sale has been finalized, the government retains no legal rights to management or oversight of the asset.
Sales of businesses also are 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 maintain ownership of its stock or membership interests. This differs from an entity sale where a buyer purchases the stock or membership interests of the company.
