New issuance in the collateralized mortgage obligation market totaled $176 billion in the second half of 2009, well above the $44 billion seen in the same period the prior year, according to Thomson Reuters. 

In January, Federal Reserve Vice Chairman Donald Kohn noted that "some banks appear to be assuming more complex exposures to interest rate risk through purchases of structured products." He cautioned that some may not understand the risks inherent in these products and pointed to the unexpected losses in the CMO market after the Fed raised interest rates in 1994 as an example of what can go wrong. 

Collateralized mortgage obligations are instruments that repackage the mortgage-backed securities guaranteed by U.S. government-sponsored agencies Fannie Mae , Freddie Mac and Ginnie Mae. 

At their simplest, CMOs give banks, money managers and pension funds a way to fine-tune the life expectancy of a mortgage bond. Mortgage bonds are constantly revalued based on whether and when investors expect homeowners to prepay their mortgages. Homeowners are more likely to refinance or buy a new home when rates are low and stay put when rates are high. CMOs slice up the expected maturity further, so investors like banks can buy securities with shorter durations and pension funds, which have long-term liabilities, can buy securities that mature much later.
 
Kohn speech.

2 Feb 2010 -

Sensitive assets

20 Jan 2010 -

Not riding the wave