Collateralized Mortgage Obligations (CMO)

A multi-class bond backed by a pool of mortgage pass-through securities or mortgage loans.

 

CMOs are securities created from pools of mortgages, similar to pass-through securities. This type of mortgage-backed security was developed to provide investors a greater range of time frames and a greater cash-flow certainty than previously offered by mortgage-backed, pass-through securities.The difference between a CMO and a pass-through security is that in a CMO structure, many different securities are created from pools of mortgages by redirecting the cash flows of principal and interest. The issuer collateralizes a pool of various class mortgage loans and creates a tranche. A tranche segregates portions of the cash flow from the CMO in order to redirect its principal and interest payments to other tranches based on a predetermined distribution schedule established when the CMO was created. One CMO may be entitled to receive a certain amount of principal from the pool before all the others.

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