It is clear to me that Collateralized Mortgage obligations are backed by Mortgage Pass through security and that Mortgae pass through securities are backed by loans/mortgages etc.
I have read that the reason to create CMO is tranching, hence the ability to investors to be exposed to different type of credit/prepayment/extension risk.
My question is why a 3 layers structure is needed?
Couldn’t just the Mortgage Pass through security be structured on different tranches that would have different priorities of payments? Am I missing something here?
Thanks a lot!