Collateralized mortgage obligations, or CMOs, were first
introduced to the marketplace in the
early 1980's. CMO is a generic term for a certificate or security backed by a pool of loans. It
represents a rather aggressive "slicing and dicing" of the normal P&I payments generated by a
pool of loans to create and sell certificates collaterally secured by the pool while retaining
ownership of the underlying loans.
The goal is to produce a bond-like investment product that fits investor's needs better than
direct participation in the loans. The CMO model allows for certificates to be custom tailored
satisfying individual investor needs with differing maturity dates and interest rates while
providing predictable cash flows and rate of returns.
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The Collateralized Mortgage Obligations module helps minimize the prepayment risk commonly
associated with CMOs by carefully matching the amount, interest rate and maturity of the
certificates sold with the anticipated aggregate payments of the underlying pool of loans.
Other common terms used to describe the CMO model are MBS - Mortgage Backed Securities; ABS -
Asset Backed Securities; REMICs - Real Estate Mortgage Investment Conduits.
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