Collateralized Mortgage Obligations (CMOs)

Collateralized Mortgage Obligations (CMOs) are investment securities backed by a pool of mortgage loans. These mortgages generate monthly payments, which are used to pay investors in the CMO. CMOs are divided into different classes, or tranches, each with varying levels of risk and returns. Some tranches may receive payments first, while others wait longer but might offer higher returns. This structure allows investors to choose options based on their risk tolerance and investment goals. Essentially, CMOs turn mortgage loans into tradable securities, making it easier for banks to manage risk and for investors to earn income.