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 entity, and receive payments according to a defined set of rules. The mortgages themselves are called the collateral, the bonds are called tranches (also called classes), and the set of rules that dictates how money received from the collateral will be distributed is called the structure. The legal entity, collateral, and structure are collectively referred to as the deal.
Within the family of loan programs, Collateralized Mortgage Obligations – CMO’s – can now be considered for underwriting under the following conditions.
- We must have a current account statement verifying ownership. (We will not accept screenshots in lieu of account statements)
- The CMO’s must be rated
- Must have secondary market (liquid). Underwriting will determine this.
- Cannot be one position i.e., $10MM in one CMO- Bad; $3MM in 3 different CMO’s and $1MM in stock – better; $2MM in CMO’s $8MM in stock- best. CMO’s should be one part, and not dominate, a multi-securities portfolio.