CMO vs CDO, What is the difference?

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Rydex

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1.) If a CDO uses residential mortgages as the underlying collateral, wouldnt that make it a CMO? Is it true to say that a CMO always equals a CDO, but a CDO does not always equal a CMO, depending up the pool of collateral in the CDO?
2.) Can a CMO pool commercial mortgage backed securities, or would that then make it a CDO?
3.) If a pool of residential mortgage loans are used to pay down various tranches, does this make the instrument a CMO? What about if there are not tranches, is it then called a Mortgage Pass through and deemed a MBS?
4.) If the pool is of student loans and they are used to pay down various tranches, is this called a CDO, or is it an ABS? If a pool of ABSs are used to pay down various tranches, is it then called a CDO?
 
CDO usually use “high-risk” bank debt as underlying.
 
CDO was some special scheming dogsh@t they cooked up, they’ve had to give it a cool sounding name and a lot of spin.
 
1. CDOs can use anything as collateral. CMOs are always backed by mortgage loans. CDOs can have loans, corporates, bank loans, CMBS, RMBS, mezzanine debt, subordinate mortgage debt, all of the above and more. CMOs generally pay down sequentially (top to bottom, with losses hitting the bottom and going up), and have a static pool of underlying loans. CDOs also generally pay sequentially, but tend to have more varied structures with triggers and tests that change how the cash flows work. They are also often actively managed (see below) and they always have an equity piece that is maintained most often by the issuer.
2. CMOs that have commercial mortgages as the collateral are CMBS.
3. CMOs that have residential mortgages as collateral are RMBS. The typical CMO structure, or REMIC, has the principal flowing through the structure sequentially, whereas pass-throughs pay principal to all classes on a pro rata basis. They’re all kind of lumped under RMBS if resi mortgages back them.
4. If student loans are the collateral, then they are called student loan ABS (asset-backed securities).
CDOs are often actively managed for a period of 5 years. Particularly when the underlying collateral is short-term. The manager can use the proceeds of maturing collateral to re-purchase new collateral. That can extend the life of the liabilities, which was good for the issuer/manager. CDOs were used as attractive fixed-rate financing back in the day. In a CMO/REMIC structure, the proceeds from maturing loans immediately pay down the top of the structure. There is no equity piece.
CDOs got tons of credit (undeservedly) from the rating agencies for diversification. They put a diversified pool of sh*t together and created AAA ratings from it. And, given the managed feature, the pool of crud that you bought into might look very different in a year or two.
 
I am talking in practice here, not from a Fabozzi book, Ive read the Fabozzi books, but I still see cusips labeled as CDO’s in bloomberg where they securitize RMBS’s. That would lead me to believe that a CDO can infact issue tranches that are backed by securities that are backed by residential mortgages. What about a RE-Remic of CMOs, is that then considered a CDO? For instance, what if you securitize various tranches of various CMOs, sell bonds on these newly pooled CMO tranches, is that a CDO?
So, are asset backed securities all pass throughs, meaning they pay pro rata the net coupons and principal payments, to the various classes. Or can some be traunched to spread the prepayment or defualt risk amongst the classes?
 
cfa2Grunt, thank you for the very good answer. Perfect.
Marcie69, come on!!!!
 
In practice, we usually call a straight re-REMIC a re-REMIC. Because it uses a REMIC structure and not a CDO structure. When you start throwing different types of securities in a bucket and actively manage it and have a residual/equity class, you can’t use the REMIC structure.
 
CMO = only mortgage. CDO = any kinds of debt (including mortgage too).
Finance has become soup of alphabet.
 
I guess, in theory, that would be true. But CMOs are basically just considered a different asset class than CDOs. And CMOs came first. Dealers just started thinking, “If you can throw a bunch of mortgages into a structure and get advantageous ratings/pricing (vs. a pool of loans), then why not do the same with other stuff?”
 
Right, but leveraged loans are sometimes thrown into a CDO with other asset classes.
 
Rydex Wrote:
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> So, are asset backed securities all pass throughs,
> meaning they pay pro rata the net coupons and
> principal payments, to the various classes. Or
> can some be traunched to spread the prepayment or
> defualt risk amongst the classes?
You can time tranche securitizations pretty easily, you see this in auto and MBS pretty often. Many times you’ll have a money market tranche with a very short maturity (maybe 3mos), followed by several other maturity profiles.
Don’t think I’ve ever seen a deal that applies default risk in any other way than pushing it downwards.
 
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