Credit Protection
CMOs are most often backed by mortgage loans, which are originated by thrifts (savings and loans), mortgage companies, and the consumer lending units of large commercial banks. Loans meeting certain size and credit criteria can be insured against losses resulting from borrower delinquencies and defaults by any of the Government Sponsored Enterprises (GSEs) (Freddie Mac, Fannie Mae, or Ginnie Mae). GSE guaranteed loans can serve as collateral for "Agency CMOs", which are subject to interest rate risk but not credit risk. Loans not meeting these criteria are referred to as "Non-Conforming", and can serve as collateral for "private label mortgage bonds", which are also called "whole loan CMOs". Whole loan CMOs are subject to both credit risk and interest rate risk. Issuers of whole loan CMOs generally structure their deals to reduce the credit risk of all certain classes of bonds ("Senior Bonds") by utilizing various forms of credit protection in the structure of the deal.
Read more about this topic: Collateralized Mortgage Obligation
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