What is ‘Calamity Call’
A call feature of a Collateralized Mortgage Obligation (CMO) designed primarily to reduce the issuer’s reinvestment risk. If the cash flow generated by the underlying collateral is not enough to support the scheduled principal and interest payments, then the issuer is required to retire a portion of the CMO issue.
Also known as a “clean-up call.”
Explaining ‘Calamity Call’
A Calamity Call is only one type of protection used in CMOs. Other types of protection include overcollateralization and pool insurance. In addition to protecting against reinvestment risk, Calamity Calls can be used to protect against default losses. They can be used in CMOs structured from second lien mortgages, where there is more limited protection against default losses. This is in contrast to overcollateralization which may be enough to provide sufficient protection to underlying pools of conventional fixed-rate mortgages.
Further Reading
- South Africa's Post-Apartheid Microcredit-Driven Calamity: Comparing 'Developmental'to 'Anti-Developmental'Local Financial Models – papers.ssrn.com [PDF]
- Eugen Varga and the Calamity of Stalinist Economics – www.tandfonline.com [PDF]
- E. Banks, The Palgrave Macmillan Dictionary of Finance, Investment and Banking© Erik Banks 2010 – link.springer.com [PDF]
- Confronting the retirement funding calamity: A Christian perspective – cbfa-cbar.org [PDF]
- The ultimate calamity scenario in US arts funding: eliminating the national endowment for the arts – www.tandfonline.com [PDF]
