Collateralized Mortgage Obligation

What Does Collateralized Mortgage Obligation Mean?

A collateralized mortgage obligation (CMO) is a set of mortgage loans (often numbering in the thousands) that are grouped together and sold as a financial instrument or investment opportunity.

CMOs are complex financial instruments, which contains groupings of mortgages that each have different features. There is, in other words, no single interest rate, maturity date, or principal for the entire CMO; rather, there are individual ones for each of these groupings.

Insuranceopedia Explains Collateralized Mortgage Obligation

Although mortgages have been around much longer, CMOs were first introduced in 1983. They predate collateralized debt obligations (CDOs), which function in much the same way but include various types of loans besides mortgages.

Since collateralized mortgage obligations are composed of a number of mortgage loans, they are rather volatile investments. Like mortgages themselves, they are greatly affected by interest rate fluctuations, mass foreclosures, and general economic trends.

CMOs are purchased by large investors, including hedge funds and financial institutions like banks and insurance companies.