What is a collateralized mortgage obligation?

A collateralized mortgage obligation, or CMO, is a type of MBS in which mortgages are bundled together and sold as one investment, ordered by maturity and level of risk. A mortgage-backed security, or an MBS, is a kind of asset-backed security that represents the amount of interest in a pool of mortgage loans.

What are collateralized debt obligations (CDOs)?

Like CMOs, collateralized debt obligations (CDOs) consist of a group of loans bundled together and sold as an investment vehicle. However, whereas CMOs only contain mortgages, CDOs contain a range of loans such as car loans, credit cards, commercial loans, and even mortgages.

What are mortgage-backed securities (MBS) & collateralized mortgage obligations (CMO)?

Mortgage-backed securities (MBS) and collateralized mortgage obligations (CMO) are different types of asset-backed securities that use mortgage-backed securities as collateral. Securities are investments that trade on the secondary market.

What happens if you over-collateralize a mortgage?

In over-collateralization, the issuer will post more collateral than is necessary in an attempt to obtain a better debt rating from a credit rating agency. A better rating is often assigned because investors are cushioned (to some extent) from a certain level of default on mortgages within the pool.