What is Collateralized Mortgage Obligation (CMO)?
Let's find out Collateralized Mortgage Obligation (CMO) meaning, definition in crypto, what is Collateralized Mortgage Obligation (CMO), and all other detailed facts.
A collateralized mortgage obligation (CMO) is a collection of multiple mortgages that are bundled together as a package. The package is offered to investors as a way for a bank to gain some liquidity. It is a mortgage-backed security measure. In turn, investors get collateralized loan packages as well as all future loan repayments.
CMOs are considered to be versatile investments. However, they are considered risky for the purchasers. Since they are made up of several different mortgages, there is a high chance that one of them may be defaulted, meaning that the borrower failed to return the entire loan. For this reason, CMOs are seen as some of the riskiest financial investments.
A CMO provides an investor with significant collateral value. This means that if an investor owns a CMO containing seven mortgage loans taken out by different customers, they will either receive repayments of all loans or claim ownership of the collateral from the defaulted loans. Thus, CMOs are seen as a viable strategy for diversifying investment portfolios.
CMOs were prominent prior to the 2008 global financial crisis. The primary cause of the financial crash in the US and the rest of the world was an influx of collateralized debt obligations (CDOs) being defaulted. CDOs function similarly to CMOs; however, they also allow banks to bundle up other credits alongside mortgage loans.
Since it was becoming increasingly difficult for borrowers to pay their monthly loan installments, many loans in the CDOs were defaulting. This led to a housing market crash and a sudden fall of property value. Many borrowers lost the property they took the loans for, while institutional investors saw massive financial losses.
After the financial crisis, stricter regulations were put in place to manage CDOs and CMOs. Despite the consequences of the 2008 crisis, CMOs have remained a lucrative investment opportunity. Thanks to regulatory improvements and stricter bank regulations, the housing market has corrected its course and CMOs have started to regain their value.