Understanding CMOs


CMOs have passed the quarter-century mark and are becoming a more important component of investment managers’ arsenals.


As we go through the different market conditions, we use different tranches for our returns.


Ray Gilliam, Prime Institutional Group


CMOs are collateralized mortgage obligation bonds, and are also known as REMICs (Real Estate Mortgage Investment Conduits). Prime Institutional’s Allen Paksima reports they were first introduced in 1983 and are comprised of large pools of individual residential mortgages.


At the end of 2009 CMOs were about a $1.25 trillion market. That represents about 22% of the total agency mortgage market, which is a little over $5.5 trillion.


One possible appeal of CMO investing could be increased predictability. While mortgage-holders may prepay mortgages, cutting the pools into tranches makes it easier to build more- regular returns, Ray Gilliam said.


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