Mortgage loans and CMOs

Tina

How is a mortgage loan transformed into a CMO?
Purpose of CMO?

Nov 27 2013 10:36 PM

2 Answer(s)

Binny

This the process involved.

John goes to his local Wells Fargo bank to get a home loan for $1 million. The bank approves his credit and gives him the loan. Similarly Wells Fargo provides such loans to 1000's of families. Wells Fargo will categorize these loans based on the families risk profiles.

Wells Fargo will then sell these loans to investment banks such as goldman sachs, credit suisse etc. These investment banks will further sub divide these loans into asset pools and issue ownership units in these asset pools. So individual investors can buy 1 or 2 shares in these CMO / CLO's.

Dec 17 2013 12:20 PM

Binny

The purpose of a CMO/CLO is to reduce the risk on banks such as wells fargo and to transfer the risk to individual investors. Individual investors if they put together a well thought out portfolio, can see good returns on such CLO's.

Dec 17 2013 12:21 PM

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