What it is:
How it works/Example:
An MCFO pays interest and principal payments at a specified rate similar to a bond.
Monthly payments from a pool of underlying mortgages are bundled
together and then used to make principal and interest payments on the
MCFO. The MCFOs are unsecured and are issued in a range of classes, or tranches, that vary in risk.
Why it Matters:
It is important not to confuse MCFOs with collateralized mortgage
obligations (CMOs). The two securities function in a similar manner,
but CMOs have direct liens on the underlying mortgages (meaning the
underlying mortgages are collateral
for the CMOs). MCFOs are simply a contract -- MCFO owners have no legal
rights to the actual underlying mortgages, meaning that all else being
equal, MCFOs are riskier than CMOs.
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