What is a 'Calamity Call'

A calamity call is a protective call feature found in a collateralized mortgage obligation (CMO). If the cash flow generated by the underlying collateral is not enough to support the scheduled principal and interest payments, either because of loan defaults or prepayment, then the issuer will retire a portion of the CMO. It is designed primarily to reduce the issuer's reinvestment risk. 

A clean-up call is another name for a calamity call.

BREAKING DOWN 'Calamity Call'

collateralized mortgage obligation (CMO), is a security which is backed by a pool of mortgages, also sometimes known as Real Estate Mortgage Investment Conduits (REMICs). Investors utilize CMOs to gain access to mortgage cash flows without originating, or purchasing, the mortgages themselves. CMOs garner cash flow as the borrowers repay their mortgages, and this repayment serves as collateral. The collateralized mortgage obligation (CMO) provides income for the investors from the principal and interest. A calamity call provision provides built-in protection for the CMO investors and guarantees their income flow is uninterrupted. The calamity, or clean-up, call reduces the risk of default while also protecting the issuer from reinvestment risk.

A calamity call is one type of protection used in CMOs. Other types of protection include over-collateralization and pool insurance. In addition to protecting against reinvestment risk, calamity calls can be used to protect against default losses. They may be used in CMOs structured from second lien mortgages, where limited protection is available against default losses. For conventional fixed-rate mortgages, over-collateralization may provide sufficient protection to the underlying pool of mortgages.

In some circumstances, a calamity call references a type of extraordinary redemption provision, usually found in municipal bonds. As an example, a calamity call can offset lost revenue from a municipal bond, issued to secure the construction of a community building, which later has significant damage limiting its ability to generate revenue. This kind of calamity call is also known as a catastrophe call.

Example of a Calamity Call

Company A issues a $10 million CMO that generates $500,000 each month from underlying mortgage interest and principal payments. When a significant number of the mortgage holders either default on their loans or prepay due to selling their homes before their mortgage being paid off, the CMO no longer produces enough income to pay its investors. Company A could then be required to retire part of the CMO to pay the investors.

  1. Mortgage Rate

    A mortgage rate is the rate of interest charged on a mortgage. ...
  2. Home Mortgage

    A home mortgage is a loan given by a bank, mortgage company or ...
  3. Real Estate Mortgage Investment ...

    A special purpose vehicle (SPV) that is used to pool mortgage ...
  4. Risk-Based Mortgage Pricing

    Risk-based mortgage pricing is when a mortgage lender tailors ...
  5. Mortgage Interest

    Mortgage interest is the interest paid by homeowners on the financing ...
  6. Mortgage Insurance

    Mortgage insurance protects a mortgage lender or title holder ...
Related Articles
  1. Investing

    CMO vs CDO: Same Outside, Different Inside

    The concept of collateralizing and structured financing predates the market for collateralized mortgage obligations and collateralized debt obligations.
  2. Personal Finance

    Shopping for a Mortgage in 2017? Use This Tool First

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2017 can all be done online.
  3. Personal Finance

    Ways to Be Mortgage-Free Faster

    Getting rid of this debt faster has bigger benefits than you might think.
  4. Personal Finance

    5 Things You Shouldn't Tell Your Mortgage Broker

    Applying for a mortgage can be a strenuous process. Here are five things to avoid doing when meeting with your mortgage broker.
  5. IPF - Mortgage

    Comparing Reverse Mortgages vs. Forward Mortgages

    Which one a homeowner chooses depends on where you are at this point in your life, personally and financially. Learn the differences and how they impact you.
  6. Personal Finance

    Reduce Interest With An All-In-One Mortgage

    "Offset" mortgages combine a checking account, home-equity loan and mortgage into one account.
  7. IPF - Mortgage

    Should I Consolidate My Two Mortgages?

    Consolidating your loans or mortgage may make sense for you, depending upon their interest rates. Here’s what you should know.
  8. Investing

    Mortgage Rates Move Higher as Fed Signals Rate Hikes Are Coming

    Mortgage rates continue to increase after the Fed signaled that three rate hikes are likely this year.
  9. Investing

    Find Security In Covered Bonds

    Find out about a safe investing alternative that could have prevented the subprime meltdown.
  1. The Differences Between a Collateralized Debt Obligation (CDO) and an Asset Backed ...

    Learn about the differences in relationships between asset-backed securities (ABS) and collateralized debt obligations (CDOs) Read Answer >>
  2. If My Mortgage Lender Goes Bankrupt, Do I Still Have to Pay My Mortgage?

    Yes, if your mortgage lender goes bankrupt you do still need to pay your mortgage obligation. Here's what usually happens ... Read Answer >>
Hot Definitions
  1. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  4. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
Trading Center