Does the owner of a collateralized debt obligation receive regular payments or just a lump sum at maturity?
When I pay my mortgage payment, does some portion of that get passed along to the debt holder?
Thanks,
Rob
Yes or maybe no.
If your mortgage was sold and put into a CMO (collateralized mortgage obligation) which was a straight pass through, then each holder would get a proportional part. But the CMO might have been organized with different tranches where different classes of claims are entitled to different amounts.
One of the simplest is an IO/PO arrangement. There are two classes Interest-only and Principal-only. Each payment is separated into that portion that is interest and principal and those are passed through to the different claimants. If you prepaid your mortgage, that would be a principal payment and it would go entirely to the PO part with the IOs getting nothing.
But yes in most CMOS your payments would be passed through to someone except for the management fee or expenses portion.
If you mean the actual routine processing of payments, the mundane day-to-day mechanics are typically handled by a ‘servicer’, a corporation that has been contracted to do that stuff. Your payments are probably sent to such a servicer rather than directly to the CMO.
The ‘owner’ of many CMOs is an amorphous shell of a corporation that is, in turn, held by lots and lots of people and entities in a very complicated arrangement. If, by ‘owner’ and ‘debt holder’ you meant this shell corporation: yes, it receives money from the servicer regularly, and distributes it (or not) according to a very complicated set of rules to the individuals, companies, and other entities that hold varying sorts of interest in it.
If you were envisioning a single person or even a small set of people as the ‘owner’ and ‘debt holder’, then you should know that most likely it doesn’t work anything like that.
What I envisioned was that 1000 or whatever mortgages were put into a pool and shares were sold to individual investors. Each share got a piece of each of the 1000 mortgages. Mortgages in the pool were from all different parts of the country and each had a different risk associated with it and reflected in the interest rate, yielding an average risk.
Weren’t these securities then further retranched into low, medium and high risk securities as well?
Also, was there a similar instrument for rents, i.e. the instrument was a portion of the rent on several different properties?