What Is a Mortgage Par Rate?

CMO is a multi-level transfer security that comprehensively reflects the characteristics of instalment payment securities and tiered payment securities. The core technology of the bond structure is to create short-, medium-, and long-term securities according to the amount of income generated by each asset in the future in order to reduce the systemic risk faced by investors.

Mortgage-backed bond

CMO is a multi-level

Collateralized Mortgage Obligation (CMO)

A typical CMO generally contains several "regular-grade" bonds and a "residual-grade" bond, of which the last level of "regular-grade" bonds is also referred to as "Z-grade" bonds. Interest is calculated at the same time after the issuance of each of the "regular" bonds except for the "Z" bonds, but

The term cash tiering technology is used to restructure the cash flow of the basic loan portfolio to create securities with different term grades. Investors' risks and potential returns increase with the extension of the term of the securities. The typical form of CMO generally includes four grade bonds: A, B, C, and Z bonds. The cash flow of the loan portfolio is first used to pay for A-grade bonds

Introduction

The CMO transaction structure divides the risk and duration of the asset pool in more detail on the basis of the structure of the securities transfer transaction. It supports the inherent risk of assets being divided and reorganized into "derivative risks" of different natures and levels and distributed to those accordingly. Able to understand market participants who are willing to absorb these risks and expect to receive corresponding risk compensation. Trading products better meet the needs of investors with different risk and liquidity preferences, attract more investors, and enhance the competitiveness of asset-backed securities. To improve financing efficiency. In practice, "residual-grade" bonds are generally not issued and held by the promoters. On the one hand, it can reduce the issuance costs, and on the other hand, it also acts as an excess mortgage and credit enhancement for "regular-grade" bonds. Risks that must be borne by securitization financing, but at the same time, the promoters can also obtain possible additional benefits in the future.

Obviously, if any asset in the asset pool defaults in the CMO structure, the lowest-ranking bond will bear the loss first, and as the loss in the asset pool increases, other bonds may also be affected. Therefore, among the various grades of CMO securities, the higher the grade, the shorter the term, the lower the risk, but the smaller the return; the lower the grade, the longer the term, the greater the risk, but the greater the return. . All investors who invest in the same level of CMO bonds share the losses of that level of bonds equally. During the transaction period, due to the different principal and interest payment periods of different grades of CMO bonds, the cash flow between the special accounts of the trustee's collection and payment will inevitably appear asymmetric. Generally speaking, the cash inflow in the early period is greater than the cash expenditure, but the reverse is in the later period. The trustee is obliged to make appropriate reinvestment of the remaining cash in the special account for collection, so as to guarantee the repayment of the principal and interest of investors in the later period.

When CMO was first introduced, high-yield corporate bonds and loans were used as asset pool collateral. As the market became more familiar with the structure and risks of CMOs, CMO collaterals are now gradually being incorporated into various types of assets, such as emerging market bonds , Small business loans, project financing loans, housing loans, consumer receivable loans or even other CMO bonds); CMO's transaction structure has also expanded from the most basic cash flow type to market value type, synthetic type and mixed type.

Cash flow CMO

A cash flow CMO is a structured financing tool that issues bonds of different credit levels and uses the proceeds to purchase a securitization transaction asset pool and uses the cash flow generated by the asset pool to pay bond investors. The repayment to each investor is generally the highest priority for investors holding bonds with the highest rating, and so on, and finally the equity investor who first bears the risk of loss of the asset pool and whose CMO is usually not rated . As a return on bearing the first credit loss risk of the asset pool, equity investors can usually get most of the remaining interest in the asset pool, and their investment returns may be higher. SPV will use the proceeds from the issuance of CMOs to purchase securitized assets and pay for related costs in the execution of transactions.

Synthetic CMO

Synthetic CMO is a structured tool that uses credit derivatives to realize the same function as a cash flow CMO with the function of transferring credit risk without the actual transfer of assets. In a synthetic CMO, the investor's money is not directly used to purchase securitized assets from the sponsor. The SPV only owns the securitized assets in name, and the assets actually belong to the promoter. SPV will sign a credit default swap with a third party for securitized assets, and a third party will purchase credit insurance for securitized assets from SPV. The third party will regularly pay asset credit premiums to SPV, and SPV will bear the securities Credit risk of assets. Securities issuance funds can be held by SPV or third parties. Investor funds held by SPV should be invested in low-risk qualified financial instruments such as public debt in accordance with transaction regulations. Securities principal and interest repayments are derived from asset credit premiums and investment income from securities issuance. In the case of SPV holding securities issuance funds, when credit losses occur on securitized assets, SPV shall pay the third party the credit loss amount of securitized assets, and SPV shall pay the remaining amounts held by securitization transactions when the securitization transaction is terminated Return of investors. If the securities issuance amount is held by a third party, SPV will coordinate with the third party when the securitization asset is in default and evaluate and confirm the loss. The third party will deduct the remaining amount of the credit loss of the securitization asset at the end of the transaction. Payment to securities investors. In addition to the risky trading of debt instruments, synthetic CMOs can also be used for bundle enterprises or other types of credit risk. Synthetic CMOs can have different transaction structures, and their underlying assets can be either physical assets or derivatives.

Market Value CMO

Market value CMOs are similar to cash flow CMOs in that the investment amount that an investor purchases in securities is used to purchase securitized assets. However, SPV does not issue securities based on the face value of securitized assets but on the advance rate of each type of asset. Because the lending ratio of each type of asset generally depends on its historical price or return volatility and is not the same as each other, the securitized asset pool will be regularly evaluated at market prices. If the value of the asset pool is too low to deviate from its loan ratio, the asset collateral will be sold to restore the asset loan ratio to its proper level, and the cash proceeds from the sale of the collateral will be repaid to the investor. Market value CMO securitized assets can be traditional corporate bonds and loans, or other financial instruments such as private enterprise stocks or hedge fund shares.

Hybrid CMO

Hybrid CMOs are named after the "hybrid" structure of their asset pools. The securitized assets of this type of CMOs include both assets purchased from the initiator and assets designated through credit default exchange contracts, which determines the hybrid CMO. It has the characteristics of each type of CMO.

The CMO's transaction structure can be further divided into: static type (that is, the assets in the asset pool remain unchanged during the transaction period) and partial management type (that is, the service provider can sell the asset pool during the asset pool management process). Any asset deemed to be at risk of default), actively managed (that is, the service provider can decide to buy and sell securitized assets on its own, in order to implement active credit risk management of the asset pool and maximize the profits of investors holding equity-level CMOs ) And other types.