Collateralized Mortgage Obligations (CMOs)

Collateralized Mortgage Obligations or CMO are among Wall Street's latest trendy investments. Collateralized Mortgage Obligations or CMO are invented by Wall Street just as the government invented mortgage bonds in the 1960s. However, few people actually understand what Collateralized Mortgage Obligations or CMO are.

What are collateralized mortgage obligations or CMO?

Collateralized Mortgage Obligations or CMOs are created by grouping together pools of pass-through securities, primarily backed by:

• Ginnie Mae,
• Fannie Mae or
• Freddie Mac MBS and

forming a trust to pay out the cash flows from the MBS pools to different Collateralized Mortgage Obligations or CMO classes.

Classes of Collateralized Mortgage Obligations (CMO)

Each class of Collateralized Mortgage Obligations has its own:

• coupon rate,
• average life and
•  payment schedule.

Please note that mortgage backed securities and Collateralized Mortgage Obligations are not simple securities. Collateralized Mortgage Obligations may not be suitable for all investors seeking high yields.

All mortgage backed securities and Collateralized Mortgage Obligations (CMOs) do not have the same characteristics. Even though two Collateralized Mortgage Obligations (CMOs) have the same underlying collateral, they may differ greatly in their average life, profile and price volatility.

Average life and yield of Collateralized Mortgage Obligations (CMOs) are estimated based on current prepayment assumptions relating to the underlying mortgage loans and will fluctuate depending on the actual prepayment experience and changes in current interest rates.