AGENCY COLLATERALIZED

MORTGAGE OBLIGATIONS

Resulting securities when the

cash flows of pools of mortgage
pass-through securities are
redistributed to different bond
classes.

NONAGENCY MBS

Represents MBS issued other

than Ginnie Mae, Fannie Mae,
and Freddie Mac.

Issued by conduits of:

Key innovations in CMO market

1. Sequential-Pay Tranches
2. Accrual tranches
3. Planned Amortization Class
Bonds
PLANNED AMORTIZATION CLASS
TRANCHES

Prepayments are within

specified range.

Cash flow pattern is known.

Greater predictability of the

cash flows.

Has par value

Investors prefer fast
prepayments.
Inverse relationship
to interest.

1. Commercial Banks
2. Investment Banking Firms
3. Entities not associated with
either CB or IBF
Credit Enhancement

Credit support for

Nonagency CMO

Non-PAC classes

Companion
Bonds/support

AGENCY STRIPPED MORTGAGEBACKED SECURITIES

Alters the cash flow division of

mortgage pass-through.

CLASSES
1. Interest-Only Class or IO
Class
Receives only
interest
No par value
Investor prefers slow
prepayments
Direct relationship to
interest.
2. Principal-Only Class or PO
Class
Receives only
principal

Needed to
absorb
expected
losses from
underlying
loan pool
due to
defaults.

Four forms of Credit Enhancement:

1. Senior-subordinate structure
2. Excess Spread

The interest from the

collateral that is not
being used to satisfy (i.e.,
the interest payments to
the tranches in the
structure) and the fees
(such as mortgage
servicing and
administrative fees).

3. Overcollateralization

Excess over liabilities

Can absorb losses

4. Monoline insurance

An insurance which only

provide financial
guarantees.