Equity Home Loans

What is the difference between Collateralized Mortgage Obligations and other mortgage backed securities?

How do CMO's differ from any other mortgage-backed bundles? I know fannie mae finances primarily by selling the latter, so what is the benefit in CMO's in comparison to them?

Public Comments

1. The original MBS were pass-through MBS -- where the cash flows (principal plus interest) were passed through to the investors -- except for a small piece of the interest that is taken out for servicing. Investors didn't like the prepayment risks. In the mid-1980s, Dexter Senft -- then the head of Fixed Income Research at First Boston -- came up with the idea for CMOs. With a CMO, the cash flows of the MBS are filtered into several different bonds -- each having a different risk profile. These were called Tranches or Classes. Some tranches had very little prepayment risk -- while others had a lot. The idea was that by breaking the cash flows into several tranches, it would allow investors to buy pieces that fit their risk profile.