Monday, February 08, 2010

A good and interesting question...

Submitted by Russell Rankin...If a mortgage is collateralized into a CMO then sold to an investor; then the investor purchases a credit default swap; then the CMO drops to zero value on the over the counter market; doesn't the issuer of the CDS have to payoff the owner of the CMO? If so, isn't the mortgage, in effect, paid off? If the owner of the CMO collects from the CDS and also the originator of the mortgage loan keeps collecting mortgage payments via the company hired to service the mortgage, isn't the mortgage being paid twice?

A. I.

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