A collateralized mortgage obligation (CMO) is a type of financial debt vehicle that was first created in 1983 by the investment banks Salomon Brothers and First Boston for U.S. mortgage lender Freddie Mac. (The Salomon Brothers team was led by Gordon Taylor. The First Boston team was led by Dexter Senft).


Legally, a CMO is a special purpose entity that is wholly separate from the institution(s) that create it. The entity is the legal owner of a set of mortgages, called a pool. Investors in a CMO buy bonds issued by the CMO, and they receive payments according to a defined set of rules. With regard to terminology, the mortgages themselves are termed collateral, the bonds are tranches (also called classes), while the structure is the set of rules that dictates how money received from the collateral will be distributed. The legal entity, collateral, and structure are collectively referred to as the deal.


Investors in CMOs include banks, hedge funds, insurance companies, pension funds, mutual funds, government agencies, and most recently central banks. This article focuses primarily on CMO bonds as traded in the United States of America.


The term collateralized mortgage obligation refers to a specific type of legal entity, but investors also frequently refer to deals issued using other types of entities such as REMICs as CMOs.

Quoted