A collateralized mortgage obligation (CMO) is a type of debt security 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 debt security issued by an abstraction - a special purpose entity - and is not a debt owed by the institution creating and operating the entity. 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 they receive payments from the income generated by the mortgages according to a defined set of rules. With regard to terminology, the mortgages themselves are termed collateral, 'classes' refers to groups of mortgages issued to borrowers of roughly similar credit worthiness, tranches are specified fractions or slices, metaphorically speaking, of a pool of mortgages and the income they produce that are combined into an individual security, while the structure is the set of rules that dictates how the income 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" technically refers to a security issued by specific type of legal entity dealing in residential mortgages, but investors also frequently refer to deals put together using other types of entities such as REMICs as CMOs.
Read more about Collateralized Mortgage Obligation: Purpose, Credit Protection, Prepayment Tranching, Coupon Tranching
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