Collateralized Mortgage Obligation (CMO) | CoinMarketCap

obligation is one of a number of mortgage-backed security used by banks to boost their liquidity. In simple terms, a CMO is a collection of several mortgages taken out by different people or companies bundled together. This bundle of loans is then offered to investors so that the bank can quickly attain some liquidity. In contrast, the investor receives a collateralized loan package and any further repayments on the loans.

CMOs are a very versatile type of investment. On the one hand, they carry significant risks for the company or fund purchasing them. As this is essentially a mixture of several mortgages, the risk increases as more than one of these might turn into a defaulted loan. However, on the flip side of things, the investor receives a lot of collateral with these bundles.

In this sense, CMOs are a useful tool for both banks and investors alike. Unfortunately, because of the highly unpredictable nature of the financial market, CMOs are also among the riskiest investments. A good example of CMOs in action was the financial crisis of 2008. The financial world in the US, and later on globally, crashed because of an influx of defaultingobligations . CDOs essentially take the principle of CMO one step further and allow banks to bundle up mortgage loans and other types of credits. In 2008, many of the CMOs in these debt obligations started defaulting, as more and more people couldn’t afford to pay their monthly installments.

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