BiggerPockets

What is a CMO. Collateralized Mortgage Obligation? I think these were honking big instruments that are only feasible for large funds to hold. What are the actual values on these things?

Given that the rating agencies have really messed up the valuation on these, how would you ever decide what they're worth?

Are they tied to specific properties?

So, how big are these things? Are we talking a $1 million instrument that's tied to half a dozen or so specific houses? Or, are these $100 million and tied to hundreds of houses? Does buying one take over servicing the debt or does the existing servicer stay in place? How are values set for these?

I know about them from reading about this whole lending mess. I understand these vehicles banks and brokerages have created. But, no, I've not actually bought and sold them.

I know these were created to allow banks to sell their loans more easily and that there really is (or at least was) a market for them. There were rated by the bond rating agencies to generate the ratings you mention. The problem is, though, that now its looking like these rating agencies were way too optimistic. Even the very highly rated ones are probably at a much higher risk of default than would be implied by the rating. One of the problems these big banks are having is that they have no way to put a value on these beasts. So, they have all these assets on their books at high values (something near the value of the assets, as defined by the apprasials done when the loans were made) while the actual value is much less. Home values have fallen, making these investments worth less, and the right of default has skyrocketed.

I am surprised the banks would be selling these to individuals. They were mostly sold to each other and to large investors like pension funds, municipalities, and the like. I've heard stories of towns in Norway that bought these and are now really in a bind with the losses they've incurred.

These are going to be cash on the barrelhead deals. They're essentially bonds. Certainly out of my league. Even for a AAA rated one should give a hefty discount over the supposed underlying value.

I agree that ratings are worthless. When Moody's Investor Service warned that lending underwriting standards had slipped to the point that they would begin raising subordination levels on loans it deemed in need of credit enhancement you could see the writing on the wall. I believe that it was July/August of 07 when this came out. Other rating agencies followed suit.

It is difficult to know exactly what these CMO's are acutally worth. The banking institutions don't even know. They probably throw darts on the wall and pick a number within a range. Regardless, these should be left to experienced investors with ties to wall street.

Good luck with your venture!

I'd say Efdevelopment has the right idea here...not something the average " Fix & Flip" guy should get into. Me personally, I'd rather poke myself in the eye with a toothpick than get involved with CMO'S! :)