A CMO (collateralized mortgage obligation) is a structured product that is backed and collateralized by a pool of mortgage loans and similar debt arrangements. It is a type of mortgage-backed security (MBS) that consists of a collection of mortgages packaged together and sold to investors (in which case, the investors/ lenders or holders of the securities) as one unit. These underlying assets of the mortgage loans (e.g., mortgaged assets) provide a collateral if the loan ends up in default (in case the borrower runs into default on payment/ repayment). The proceeds collected from the pool of mortgages will be used to service the debt embodied in the securities held by the investors (the lenders).

As a type of mortgage-backed security (MBS), a CMO is also backed by separate pools of pass-through security mortgages that consist of multiple classes of holders and maturities (tranches). A pass-through security constitutes a debt obligation (and in a specific aspect, a derivative instrument) embodying the cash flows associated with a certain asset or liability. It simply passes future cash flows onto an investor, the holder of a respective share in the pool. The main types of this security are mortgage backed securities (MBS) and asset backed securities (ABS).

In short, a CMO is a special type of MBS which involves packaging and selling mortgages as one investment (security), classified according to specific factors such as maturity and amount of risk. An MBS, per se, is a special case of asset-backed security (ABS) that reflects a specific interest (a pro-rata share) in a pool of mortgage loans.