Asset-backed securities are investment vehicles backed by a wide variety of commercial and consumer assets. They are formed when assets with common features are pooled together so that their combined cash flow characteristics can be packaged into interest-bearing securities. Securities backed by home equity and residential mortgages are known as mortgage-backed securities. Other assets pooled to create such securities include automobile loans, credit card receivables, equipment leases, rental car fleet loans, boat loans, franchise receivables, tax liens, and student loans, as well as pools of loans or bonds (CDOs). Financial guaranty insurers also insure structured financings that help financial institutions manage their risk profiles or obtain regulatory capital relief.

Par value of outstanding asset-backed and mortgage-backed securities insured worldwide by AFGI members now totals more than $800 billion. This compares to $92 billion in par value in 1996.

A typical transaction might flow as follows: A buyer chooses a house and obtains a mortgage. The mortgage lender pools similar mortgages and delivers them to a securities dealer, while retaining responsibility for servicing the individual mortgages. The securities dealer sells the mortgages, in whole in or in part, to investors. (These are also called "pass-through" securities, as the interest and principal generated by the underlying mortgage is passed through to investors.) The mortgage lender collects monthly payments of principal and interest from the home buyer and forwards them to the securities dealer.

Consumer and Institutional Benefit
Transactions backed by revenues from mortgages, home equity loans or consumer receivables help financial institutions replenish their capital for further lending. American consumers benefit from this use of financial guaranty insurance because it helps to make first and second mortgages and other kinds of loans more available and more affordable.

Insurance Benefits to Issuers and Investors
AFGI members have been insuring asset-backed securities since 1988. Like municipal bond insurance, insurance on asset-backed securities reduces borrowing costs for issuers, and offers better market access and greater ease of deal execution. Although interest paid to investors is slightly lower than on an equivalent uninsured security, insurance increases the marketability of the securities. For investors, insurance increases the availability of Triple-A rated securities that improve the quality, diversification and liquidity of an investment portfolio. Investors have fewer concerns about the safety of their investments since the insurers guarantee interest and principal payments.