Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Mortgage Cash Flow Obligation (MCFO)

What it is:

A mortgage cash flow obligation (MCFO) is a debt security that uses payments on a series of mortgages to fund principal and interest payments to MCFO holders.

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.