Secured mortgage bonds are a separate entity used to manage debt, taking ownership of debts including mortgages. The combined mortgage pool forms the basis for investors to purchase bonds, known as tranches, with a defined set of rules. This type of finance is associated with high-priced properties and used by banks, insurance companies, hedge funds, pensions, mutual funds, and government agencies.
The secured mortgage bond is a special purpose debt identity that is created as a means to manage debt in an entirely separate entity from the entities that established the debt in the first place. As such, the secured mortgage bond takes ownership of the debts included in the strategy. Debts may include one or more different types of mortgages.
Part of the structure for the covered mortgage obligation, or CMO, includes that all of the individual mortgages included in the entity are considered a pool. This combined mortgage pool provides the basis for investors to purchase bonds issued under the pool. When bonds are issued on mortgage pools, the bonds are referred to as tranches.
Each secured mortgage obligation will be configured with a defined set of rules. The rules, known as the structure, will dictate the type of mortgages that can be included in the CMO, the procedure for receiving money into the bond, and how it will be distributed to investors. The structure will also specify the terms and conditions necessary for the issuance and acquisition of the bonds. Within this type of finance arrangement, the mortgages themselves are intended to provide collateral for the bond issue.
Actual use of a secured mortgage bond is usually associated with high priced mortgages and is not as often employed with smaller residences. However, public buildings such as municipal facilities, shopping malls, and high-rise office buildings are all examples of properties that can be financed with a mortgage included as collateral in a CMO in an investment grade bond.
A number of different types of businesses engage in the use of a secured mortgage bond. Banks and insurance companies are two prime examples of companies that make use of this type of financial entity. The CMO can also be used in function of hedge funds, pensions and mutual funds. Government agencies can also take advantage of the secured mortgage obligation.
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