Sequential Pay CMO

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).