What is calamity call
The distress call is a function call was found protective in a secured mortgage obligation (CMO). If the cash flow generated by the existing collateral is insufficient to maintain the scheduled principal and interest payments, either because of loan default or prepayment, the Issuer will retire part of the CMO. It is designed primarily to reduce the reinvestment risk of the Issuer.
Clean-up call is another name for the trouble call.
Breaking down ‘distress call
Mortgage-backed obligation (CMO) is a security supported by a pool of mortgages, also sometimes known as mortgage loans for the purchase of real estate Investment conduits (REMICs). Investors use the CMOS to gain access to the mortgage cash flows that occur without, or to purchase, mortgages themselves. CMOS garner cash flow, as borrowers repay their mortgage loans, and the repayment that acts as collateral. Collateralized mortgage obligation (CMO) provides a return to investors of principal and interest. Disaster security call provides built-in protection for CMO investors and guarantee their income stream is continuous. Disasters, or cleaning, call reduces the risk of default and protect Issuer against the risk of reinvestment.
Distress call one type of protection used in CMOS. Other types of protection include over-collateralization and insurance pool. In addition to the protection from reinvestment risk, disasters, calls can be used to protect against losses by default. They can be used in CMOS built a second mortgage lien where companies protection against losses on default. For conventional fixed-rate, the over-collateralization could provide sufficient protection to the underlying pool of mortgages.
In some cases, disasters, call references, type of emergency, foreclosure, usually located in municipal bonds. As an example, the distress call can compensate for the loss of income from the issuance of municipal bonds issued for the construction of the community building, which subsequently has major damage that restricts its ability to generate income. This kind of accident is called also known as the disaster called.
An example of a call of distress
The company produces $ 10 million CMO that generates 500,000 $every month from the mortgage interest and principal. When a significant number of mortgage holders or default on its debt or payment, in connection with the sale of their homes before their loans are paid, the CMOS no longer produces enough income to pay its investors. The company can then be requested to retire part of the CMO to pay investors.