Most of the mortgages included in CMOs are private mortgages not qualified under VA or FHA.

• A. VA or FHA insured mortgages
• B. Private mortgages not VA or FHA
• C. Government-backed mortgages
• D. Municipal mortgages

Answer: (B)

CMOs are created by pooling mortgage loans and slicing the resulting cash flows into tranches. The vast majority of those underlying loans are conventional, privately originated mortgages rather than government-insured ones. Government-backed loans such as VA or FHA are typically securitized through separate channels (like GNMA or agency MBS programs) and are not the primary supply behind most CMOs. Municipal mortgages aren’t a typical component of standard mortgage-backed securitizations, either. So the statement that most mortgages in CMOs are private mortgages not VA or FHA accurately reflects how these securities are usually formed.