Collateralized mortgage obligation

A collateralized mortgage obligation (CMO) is a type of complex debt security that repackages and directs the payments of principal and interest from a collateral pool to different types and maturities of securities, thereby meeting investor needs. Legally, a CMO is a debt security issued by an abstraction—a special purpose entity—and is not a debt owed by the institution creating and operating the entity. The entity is the legal owner of a set of mortgages, called a pool. Investors in a CMO buy bonds issued by the entity, and they receive payments from the income generated by the mortgages according to a defined set of rules. With regard to terminology, the mortgages themselves are termed collateral, ' classes' refers to groups of mortgages issued to borrowers of roughly similar credit worthiness, tranches are specified fractions or slices, metaphorically speaking, of a pool of mortgages and the income they produce that are combined into an individual security, while the structureis the set of rules that dictates how the income received from the collateral will be distributed. The legal entity, collateral, and structure are collectively referred to as the deal. Unlike traditional mortgage pass-through securities, CMOs feature different payment streams and risks, depending on investor preferences. For tax purposes, CMOs are generally structured as Real Estate Mortgage Investment Conduits, which avoid the potential for "double-taxation."