Collateralized Mortgage Obligations (CMOs)

Mortgages are packaged into asset-backed derivative collateralized mortgage obligation (CMO) securities which are specifically designed to shift risk from one party to another. It is _most accurate_ to state that the risk is shifted:

Incorrect. Derivative contracts such as CMOs shift risk toward investors. The borrowers are unaffected by this repackaging of risk.

Incorrect. The original, underlying mortgages present risk to investors. From there, the creation of derivative securities based on these underlying mortgages does not take any additional risk from the borrowers but distributes the existing risk elsewhere.

Correct! The borrowers present risk to investors when the underlying mortgages are originated. From there, investors collectively hold the risk of the underlying mortgages. Any repackaging of these mortgages into asset-backed securities such as CMOs simply transfers risk from one investor to another, primarily through the creation of multiple CMO tranches.

from investors to borrowers.

from borrowers to investors.

from investors to other investors.