Collateralized Mortgage Obligations: Defined And Explained
Author:
Lauren BowlingJun 7, 2023
•5-minute read
Collateralized mortgage obligations (CMOs) are a type of passive real estate investment and also a type of mortgage-backed security (MBS). For those who want to invest in real estate but in a lower-risk way than REITs, house-flipping or becoming a landlord, CMOs enable investors to buy residential mortgage loans that are packaged together into one tidy investment vehicle.
What Are CMOs?
A collateralized mortgage obligation (CMO) is a fixed-income security with a pool of mortgage loans that are similar in a variety of ways, like credit score or loan amount, and are combined and resold as a single packaged investment to investors called a security.
CMOs securities are sold in a secondary market and not on the stock market. CMO structure is similar to stock dividends: investors buy the investment and receive payments (money from principal and interest) at a set schedule after the mortgage borrowers make the monthly payments on their mortgages. These principal and interest payments are the return investors receive, and CMOs can be a great way for an investor to diversify their holdings and increase their cash flow.
CMOs are issued by non-agency mortgage-backed securities like Fannie Mae, Freddie Mac or Ginnie Mae.