CMO: Collateralized Mortgage Obligations

Posted on December 13, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

By Staff Reporters

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Collateralized Mortgage Obligations (CMOs) are a form of securitized debt derived from mortgage-backed securities. It’s a form of derivative security. Like most MBS pass-through securities, CMOs are typically backed by pools of residential mortgages and their payments. But not all investors want to receive the monthly payments of principal and interest that “plain vanilla” MBS pass-throughs offer–some prefer just the principal, some prefer just the interest, or some want payments with other particular/special characteristics.

For them, the cash flows from MBS can be pooled and structured into many classes of CMOs with different maturities and payment schedules, creating securities with very specific characteristics and behaviors. These characteristics and behaviors can vary widely. Some CMOs can offer less risk than “plain-vanilla” MBS, or can help offset other forms of risk in a diversified portfolio, but others can be much more volatile.

CMOs typically have two or more bond classes, called tranches. Each tranche has its own expected maturity and cash flow pattern. The unique cash flow patterns of each CMO tranche allow investors to tailor their mortgage exposure to meet a range of investment objectives, since different classes can have different risk/return characteristics.

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FINANCIAL Derivatives

Posted on November 9, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

By Dr. David Edward Marcinko MBA MEd

SPONSOR: http://www.MarcinkoAssociates.com

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Derivatives are securities whose performance and/or structure is derived from the performance and/or structure of other assets, interest rates, or indexes. If used moderately and in appropriate situations, derivatives can help stabilize portfolios and/or enhance returns. However, if used in excess and/or in inappropriate circumstances, they can be harmful, potentially causing portfolio instability and/or losses. Derivatives are similar to medicine in their behavior–usually safe when used as directed, potentially toxic when abused.

There are many different types of derivative securities and many different ways to use them. Some derivative securities, such as mortgage-related and other asset-backed securities, are in many respects like any other investment, although they may be more volatile or less liquid than more traditional debt securities.

Futures and options are commonly used for traditional hedging purposes to attempt to protect portfolios from exposure to changing interest rates, securities prices or currency exchange rates, and for cash management purposes as a low-cost method of gaining exposure to a particular securities market without investing directly in those securities.

Certain other derivative securities may be described as structured investments. A structured investment is a security whose value or performance is linked to an underlying index or other security or asset class. Structured investments include collateralized mortgage obligations (CMOs). Structured investments also include securities backed by other types of collateral.

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Understanding Collateralized Mortgage Obligations

Posted on April 23, 2009 by Dr. David Edward Marcinko MBA MEd CMP™

Defining Terms and Concepts for Medical Professionals

By Staff Reporters

www.HealthcareFinancials.comho-journal9

A CMO is a debt security backed by mortgages. These mortgage pools are usually separated into different maturity classes called tranches (from the French word for “slice”). The securities were issued by private issuers, as well as the Federal Home Loan Mortgage Corporation (Freddie Mac). As the mortgages were usually government-guaranteed, CMOs usually carried AAA ratings until their current financial meltdown. The early versions of CMOs were known as “plain vanilla,” but recent developments gave us PACs (planned amortization certificates) and TACs (targeted amortization certificates); among too many others. They were all variations on how principal repayments in advance of maturity date were treated.

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