Collateralized Mortgage Obligation
Definition
CMO. A mortgage-backed, investment-grade bond that separates mortgage pools into different maturity classes. Collateralized mortgage obligations (CMO) are backed by mortgage-backed securities with a fixed maturity. They can eliminate the risks associated with prepayment because each security is divided into maturity classes that are paid off in order. As a result, they yield less than other mortgage-backed securities. The maturity classes are called tranches, and they are differentiated by the type of return. A given tranch may receive interest, principal, or a combination of the two, and may include more complex stipulations. One negative aspect of collateralized mortgage obligations is the lower interest rates that compensate for the reduction in prepayment risk and increased predictability of payments. Also, collateralized mortgage obligations can be quite illiquid, which can increase the cost of buying and selling them.
Use this term in a sentence
“ You should try and make sure that you live up to everything in any collateralized mortgage obligation that you sign. ”
“ We had wanted to put our client into a low risk security backed by real estate so we suggested the Collateralized Mortgage Obligation. ”
“ The collateralized mortgage obligation was good because it separated things into different maturity classes and that was needed for sure. ”
