For example, a $100mm sequential (SEQ) tranche off 6% collateral with a 6% coupon ('6 off 6') can be cut into an $92.307692mm SEQ tranche with a 6.5% coupon (and hence a higher dollar price) called a '6.5 off 6', and a SEQ PO tranche with a principal of $7.692308mm and paying a no coupon. After the first payment is received, future payments are made monthly or quarterly.The most basic CMO structure is made up of tranches that pay in   a strict sequence. Holders of Ginnie Mae mortgage-backed securities are therefore assured of receiving payments promptly each month, regardless of whether the underlying homeowners make their  payments.Fannie Mae and Freddie Mac generally guarantee timely payment of both principal and interest on their mortgage-backed securities whether or not the payments have been collected from the borrowers. Once all an underlying debt is paid off, that debt's future stream of interest is terminated and the IO expires with no terminal value. All of the available principal payments go to the first sequential tranche, until its balance is decremented to zero, then to the second, and so on. Ginnie Mae adds its guarantee to already- issued pass-through securities and CMOs that meet its standards. The "mortgage" in collateralized mortgage obligation (CMO) refers to the home mortgages on which these securities are based. CMOs have contributed to the subprime mortgage crisis. The Z tranche starts receiving interest and principal payments only after the other tranches in the CMO have been fully paid. Industry standard and various  proprietary  prepayment  rate  models exist and are used by investors to value investments in MBS. The principal (and associated coupon) stream for CMO collateral can be structured to allocate prepayment risk. This flexibility has led to increasingly varied and complex CMO structures. A CMO is essentially a way to create many different kinds of bonds from the same mortgage loan so as to please many different kinds of investors. Most pass-throughs are backed by fixed-rate mortgage loans; however, adjustable-rate mortgage loans (ARMs) are also pooled to create the securities.

If the mortgage-backed security is not guaranteed by an agency or GSE, it is classified as Most mortgage pass-through securities and CMOs are guaranteed by the Government National Mortgage Association (Ginnie Mae) or by GSEs such as the Federal National Mortgage Association (Fannie Mae), or the Federal Home Loan Mortgage Corporation (Freddie Mac):Securities guaranteed by these entities are known generically as “agency mortgage-backed securities.” Note that each agency is a separate entity, and the securities issued by Fannie Mae or Freddie Mac differ from each other and those guaranteed by Ginnie  Mae.Fannie Mae and Freddie Mac issue and guarantee pass-through securities and CMOs. These loans were financed by bank deposits and occasionally the bank’s own debt obligations, and their volume was also limited by these factors. The simplest coupon tranching is to allocate the coupon stream to an IO, and the principal stream to a PO. (indicating a 0.40%, or 40bps, spread in this example) The resulting bonds offer superior stability versus regular sequentials, and yield pickup versus PACs.

CMO Desk Trader at Freddie Mac Washington D.C. Metro Area 390 connections. If mortgage prepayments increase, or the market's expectations of future prepayments increases (i.e. The inverse formula is simply the difference of the original premium fixed rate coupon less the floater formula.