gage passthrough securities and CMOs issued by private entities. CMOs are also referred to as "paythroughs" or "multi-class passthroughs." Because they are created so as to comply with a provision in the tax law called the Real Estate Mortgage Investment Conduit, or REMIC, they are also referred to as "REMICs." Throughout this chapter we refer to these structures as simply CMOs. We will see similar paythrough or multi-class passthrough structures when we cover other asset-backed security structures in the next chapter.   Basic Principles of a CMO By investing in a mortgage passthrough security an investor is exposed to prepayment risk. Furthermore, as explained earlier, prepayment risk can be divided into extension risk and contraction risk. Some investors are concerned with extension risk and others with contraction risk when they invest in a passthrough. An investor may be willing to accept one form of prepayment risk but seek to avoid the other. For example, a cash manager seeks a short-term security and is concerned with extension risk. A portfo- lio manager who seeks a long-term security, and wants to avoid reinvest- ing unexpected principal prepayments due to refinancing of mortgages should interest rates drop, is concerned with contraction risk.     By redirecting how the cash flows of passthrough securities are paid to different bond classes that are created, securities can be created that have different exposure to prepayment risk. When the cash flows of mortgage-related products are redistributed to different bond classes, the resulting securities are called CMOs. Simply put, CMOs set forth rules for dividing up cash flows among bond classes. The basic principle is that redirecting cash flows (interest and prin- cipal) to different bond classes, called tranches, mitigates different forms of prepayment risk. It is never possible to eliminate prepayment risk. If one tranche in a CMO structure has less prepayment risk than the mortgage passthrough securities that are collateral for the structure, then another tranche in the same structure has greater prepayment risk than the collateral.   Agency Collateralized Mortgage Obligations Issuers of CMOs are the same three entities that issue agency passthrough securities: Freddie Mac, Fannie Mae, and Ginnie Mae. However, Freddie Mac and Fannie Mae have used Ginnie Mae passthroughs as collateral for their own CMOs. CMOs issued by any of these entities are referred to as agency CMOs. When an agency CMO is created it is structured so that even under the worst circumstances regarding prepayments, the interest and princi-