What does a CMO consist of?

A Collateralized Mortgage Obligation (CMO) is a type of mortgage-backed security that is structured by pooling various mortgage loans and then slicing them into different tranches, each with varying levels of risk and return. Specifically, a CMO can include different types of mortgage-backed securities issued by entities such as the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and others that are backed by pools of government-insured or conventional mortgages.

These entities provide a framework for the creation of CMOs by offering securities that are backed by collections of mortgages. As such, the presence of FNMA and FHLMC in a CMO highlights the reliance on these government-sponsored enterprises and their role in enhancing the security and liquidity of the mortgage market.

Understanding CMOs is crucial for investors since they involve more complex cash flow structures than standard mortgage-backed securities, making knowledge of their components essential for anyone studying the securities industry.