CMO Flashcards
What are collateralised mortgage obligations?
Collateralized mortgage obligation (CMO) refers to a type of mortgage-backed security that contains a pool of mortgages bundled together and sold as an investment. Organized by maturity and level of risk, CMOs receive cash flows as borrowers repay the mortgages that act as collateral on these securities. In turn, CMOs distribute principal and interest payments to their investors based on predetermined rules and agreements.
What is special about them?
The creation if collateral mortgage obligations which can help manage prepayment risk by distributing the various forms of prepayment risk among different classes of bondholders. For CMOs the
What is the difference between CMO and MBS?
While an MBS is a broad term describing asset-backed securities, a CMO is a more specific class of a mortgage-backed security. A CMO is one type of MBS that is divided into categories based on risk and maturity dates. A CMO involves pooling mortgages into a special purpose entity, where different tranches of the securities are then sold to investors.
Of what do CMOs consist?
CMOs consist of several tranches, or groups of mortgages, organized by their risk profiles. As complex financial instruments, tranches typically have different principal balances, interest rates, maturity dates and potential of repayment defaults. CMOs are sensitive to interest rate changes as well as to changes in economic conditions, such as foreclosure rates, refinance rates and the rates at which properties are sold.
What are the most common types of CMOs?
- Sequential pay tranches
- Planned amortisation class tranches
- Support tranches (higher prepayment risk)
What are the two non agency RMBS extras?
- Cash flows are distributed by rules, such as the waterfall that indicate the allocation of interest payments to tranches with various types of seniority etc.
- there are rules for the allocation of relapsed losses which specifiy that subordinated bond classes have lower payment priority.
