ABS vs CMO

C

chinni234

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
What is the difference between ABS and CMO. CMO has tranches to distribute different risk levels. Other than that are both same?
 
CMO has mortgages as collateral (and everyone calls em MBS now anyway). ABS usually refers to stuff that has other underliers like second mortgages and car loans.
 
JoeyDVivre Wrote:
——————————————————-
> CMO has mortgages as collateral (and everyone
> calls em MBS now anyway). ABS usually refers to
> stuff that has other underliers like second
> mortgages and car loans.
MBS/CMO is a type of ABS, no?
 
I’ll defer to plyon on that (who knows tons about this) who said:
“Technically speaking, MBS could be considered a sub-set of ABS. However, practically speaking, MBS were “invented” and broadly developed before non-mortgage backed securities were. So therefore, the industry tends to refer to conventional MBS and ABS as separate categories of investments (not overlapping ones – at least not with respect to conforming first lien MBS). “
 
Don’t both forms of securities employ use of tranches in various scenarios?
 
ChadD Wrote:
——————————————————-
> MBS/ABS - no tranching
> CMO/CDO - tranching
Is that a definition in your readings? It’s not one I would use. About the only MBS without tranching are whole mortgages and pools. In some sense that’s a gigantic market, but it’s a small universe of security types.
 
I was under the impression that ABS were sometiems also tranched to offer various levels of protection to investors in regards to the realizable value of the underlying asset. For instance, an ABS backed by A/R could be tranched with the outer tranches bearing most of the risk of bad debt and deductions.
 
I think MBS and ABS both can have tranching to redistribute the prepayment risk and also the added credit risk in the ABS
 
JoeyDVivre Wrote:
——————————————————-
> ChadD Wrote:
> ————————————————–
> —–
> > MBS/ABS - no tranching
> > CMO/CDO - tranching
>
> Is that a definition in your readings? It’s not
> one I would use. About the only MBS without
> tranching are whole mortgages and pools. In some
> sense that’s a gigantic market, but it’s a small
> universe of security types.
My understanding is that MBS/ABS are created by securitizing pools of loans. These passthroughs are then used as the collateral for CMO/CDOs. CMO/CDOs generally have some form of prepayment and credit tranching.
From the qbank for CMOs:
“Institutional investors have concerns about exposure to prepayment risk but to varying degrees. The ability to partition and distribute the cash flows generated by a mortgage pool into different risk packages has lead to the creation of collateralized mortgage obligations (CMOs). CMOs are securities issued against passthrough securities (securities secured by other securities) for which the cash flows have been reallocated to different bond classes called tranches, each having a different claim against the cashflows of the mortgage passthroughs or pool from which they were derived. Since CMO classes represent mixtures of contraction and extension risk, CMO securities can be matched to the unique asset/liability needs of many institutional investors and investment managers.”
qbank for CDOs:
“A collateralized debt obligation (CDO) is an ABS that is collateralized by a pool of debt obligations. A CDO has the following structure:
* One or more senior tranches.
* Several levels of mezzanine tranches.
* A subordinate tranche, also known as the equity tranche, to provide prepayment and credit protection to the other tranches.
A CDO’s collateral pool typically contains a mix of floating-rate and fixed-rate debt instruments. However, payments made to a majority of the tranche holders (the senior tranche holders) are based on a floating rate. This creates a potential cash flow mismatch. In order to control for the interest rate risk imposed by this mismatch, asset managers often use interest rate swaps. Interest rate swaps are derivative instruments that can be used to convert fixed-rate interest receipts into floating-rate payments. The inclusion of swaps in a CDO deal is almost always mandated by the rating agencies.”
 
Here’s the definitions of those things I would use:
1) MBS = any security whose underlier is a pool of mortgages. This would usually not include whole mortgages or pools because I wuld talk abut those directly (e.g., “I just bought a GNMA pool for my son’s college fund”)
2) ABS = any structured product based on the cash flows from a set of pooled assets. These woould not normally include straight up MBS because I would use MBS when talking about those.
3) CDO = a term that is sure to be replaced shortly but a general term referring to a structure that distributes credit risk using tranching.
4) CMO = an outdated term referring to a security created by tranching prepayment risk in mortgages. Generally used to refer to thngs like “CMO crisis” and other disasters.
 
Joey gave a pretty good discription.
Just think of leverage. A bunch of individual mortgages make up a MBS bond. When the bond backed by the indivudal mortgages is tranched based on risk/reward its called a CMO. (Although I would still call it a MBS security). A CDO is made up of several MBS or CMO securities although it really could be made up of anything. So a CDO is receiving cash flows from bonds that are receiving cash flows from mortgages.
Not covered in the readings but you also have CDO ^2 which are CDO’s backed by other CDO’s. Yikes. Wait there are also a few CDO Cubed which are CDO’s backed by CDO’s or CDO’s. Haha. What a joke.
 
Are there really CDO^3’s or is that just folklore? It’s like the capital market equivalent of Buffalo buffalo buffalo buffalo buffalo. (that infinitely expandable sentence).
 
CMOs were created for institutional investors to help with duration management. The Tranches will often be PACs or sequntials. Here tranching a CMO will create a product that has less prepayment risk and therefore can be bought by institutional investors such as life insurance companies that tend to manage liabilities with a focus on duration. PACs will paydown at a known rate as long as prepays and defaults are in a normal range, called a collar.
ABS have tranches that separate credit risk but the prepayments are more volatile and not as steady as PACs. This is my understanding and is an important difference between ABS and CMOs.
 
anyone read Stalla’s 2008 study notes in the ABS LOS? “Mortgages are extremely good quality assets”
i just had to laugh, although i know the text is not reflective of market conditions
 
Joey,
CDO^3s are indeed part of folklore as is the sighting of the yeti. I magine holding the quity tranche of a CDO^3 that holds the equity tranches of other CDOs!
Mike
 
pacmandefense Wrote:
——————————————————-
> anyone read Stalla’s 2008 study notes in the ABS
> LOS? “Mortgages are extremely good quality
> assets”
>
> i just had to laugh, although i know the text is
> not reflective of market conditions
did you listen to the lecture, Ben J had to keep himself from laughing to say that
 
You must log in or register to reply here.
Back
Top