Collateralized Mortgage Obligations Pricing Model

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Collateralized Mortgage Obligations Pricing Model: Collateralized Mortgage Obligation (CMO) is a form of mortgage security, and are bonds which represent claims to specific cash flows of large pool of home mortgages. This financial debt was created for the first time by investments banks in 1983 by Freddie Mac (Herold, 2004, p. 779). Once it is created by the banks it is operated separately as entity on its own and owns set of mortgages which are known as pool. Its introduction was because investors were in need of better terms and instruments which provided choices to have a variety of repayments and maturity of their mortgages.

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The purpose of this study is also to analyze on the two major types of CMO structures. According to Sec.gov (2007) CMOs should be structured in a way that even when it is at the adverse circumstances there will be adequate cash flows to pay for the interest due and the entire principal. The CMO structuring is done by use of two ways which include ensuring that total sum of all principals which are scheduled for the bonds are always equal to the total principal of the collateral (Davidson and Ho, 2002, p. 207).

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In conclusion For example, a mortgage would be split to bonds then the investor would then pay back the mortgage in form of bonds over a long period this makes the payment much more easier and the investor would decide to pay more especially when the interest is low, saving money over repayment of their mortgage which has been converted to a loan (Charles and Ramirez, 2008, p. 92). Most people should also be encouraged to get their housing solutions using much convenient and good financial planning which saves on money spent paying the mortgage and reduce risks involved by failure to service their mortgage loan.

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