COLLATERALIZED MORTGAGE OBLIGATIONS
The collateralized mortgage obligation, or CMO, was born in June, 1983. A dynamic innovation in mortgage security structure, CMOs have since grown into a $31.1 billion market, as of the end of 1985, with $15.4 billion issued last year alone.
CMOs generally retain many of the yield and credit quality advantages of pass-throughs while eliminating some of the less desirable elements of the traditional mortgage-backed security. The shnorter final maturity, enhanced call protection and semi-annual payments found on many CMO tranches make them suitable for some investors who cannot incorporate pass-throughs into their portfolios or strategies.
As a result, the profile of participants in the CMO market differs from that of pass-through owners. The wide range of risk and return characteristics found within the universe of CMO securities gives them the potential to meet the needs of a broader investor group than can the more homogeneous pass-through market.
The product
CMOs are bonds that are collateralized by whole loan mortgages or mortgage pass-through securities. In addition to the security afforded by the fully dedicated collateral, some CMO issues also posses minimum re-investment rate and minimum sinking fund guarantees.