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. Financial guaranty insurers also insure structured financings that help financial institutions manage their risk profiles or obtain regulatory capital relief.

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.