DEFINITION of ‘Calamity Call’
A call feature of a Collateralised 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.”
INVESTOPEDIA EXPLAINS ‘Calamity Call’
A Calamity Call is only one type of protection used in CMOs. Other types of protection include over-collateralisation 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 over-collateralisation which may be enough to provide sufficient protection to underlying pools of conventional fixed-rate mortgages.