Collateralized Mortgage Obligation

What Does Collateralized Mortgage Obligation Mean?

A collateralized mortgage obligation (CMO) is a financial instrument composed of a collection of mortgage loans, often numbering in the thousands, which are grouped together and sold as an investment opportunity.

CMOs are complex financial instruments that consist of various groupings of mortgages, each with different features. This means there is not a single interest rate, maturity date, or principal amount for the entire CMO; instead, each grouping has its own individual characteristics for these factors.

Insuranceopedia Explains Collateralized Mortgage Obligation

Although mortgages have existed for much longer, collateralized mortgage obligations (CMOs) were first introduced in 1983. They predate collateralized debt obligations (CDOs), which operate similarly but encompass various types of loans beyond mortgages.

Since CMOs consist of multiple mortgage loans, they are considered volatile investments. Like the underlying mortgages, their performance is significantly influenced by interest rate fluctuations, mass foreclosures, and broader economic trends.

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