With a popular movie now claiming to offer a behind-the-scenes look at the last recession, people everywhere are once again talking about collateralized debt obligations. CDOs, as they are often known, undoubtedly played a major role in the nation’s last bout of financial misery, but they are not very well understood, in general. Despite the intimidating name, collateralized debt obligations are actually fairly simple in terms of their structure and basic nature, though.
As the name suggests, every CDO is based on financial instruments that are secured with collateral. Most commonly both today and in the past, this has meant mortgages, whether of residential or commercial kinds, although car loans and financing extended toward business equipment could just as well be used. What allows for the creation of particular CDO instruments is the assembly of a number of these loans or other debt obligations together into a carefully designed package.
Once they have been collected together into an instrument whose value and returns reflect the performance of the underlying obligations, CDOs can also be further tailored to the needs of potential investors. Oftentimes, this will mean dividing them up into distinct tranches of increasing risk, with those who accept the most exposure also being guaranteed the highest returns when things go well. In the case of the last recession, what happened is that many CDOs turned out to be less secure even in their most conservative tranches than had been thought, as a major real estate meltdown caused an unprecedented number of homeowners to default.
While CDOs are essentially fairly simple, actually putting them together can be more difficult, at least in the usual case. Companies like the Freedom Mortgage Structured Products Group strive to make this easier for those with such goals, though, offering up mixtures of debt obligations that can be used to target any desired profile.
Working with a company like Freedom Mortgage, someone charged with creating a new CDO would convey criteria for selection that reflect particular goals with regard to risk level and potential returns. Freedom Mortgage SPG specialists would then look through an inventory of mortgages and other debt obligations, delivering thereafter the desired assets to the client.
While it would often be nearly impossible to put together a new CDO otherwise, relying on partners like Freedom Mortgage Correspondent Lendingcan make the process a whole lot easier. In the end, even the most complicated-seeming aspect of the collateralized debt obligation therefore turns out be simpler than might initially be supposed.