See: Collateralized Mortgage Obligation (CMO).
A CMO represents a kind of mortgage-backed security: a group of mortgages bundled together and turned into tradable securities. Despite its fancy-sounding name, the sequential pay CMO describes the most basic forms of these securities.
When creating the CMOs, the mortgages are split into groups. These groups (or tranches, as they are called in the biz) are then ordered according to seniority, i.e. which ones get paid off first. Typically, the various groups get identified with a letter: A, B, C, and (bringing up the rear) Z. Each tranche gets interest payments. However, only Tranche A gets principal payments at first. Once it gets completely paid off, Tranche B starts receiving principal payments. These continue until it gets retired completely. Then it's Tranche C's turn. And so on, all the way down to Z.
Since Tranche A gets its principal payments first, it's a lower-risk investment. There's less time for things to go wrong. Meanwhile, Tranche Z is way down on the trough. It has to wait its turn.
This structure explains the "sequential" part of the name. Each tranche gets paid off in sequence. Each one waits its turn (except for A, who, like the first-born in any family, gets all the attention from the start...with the other tranches all having to deal with that fact in therapy).
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Finance: What is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello
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