Mortgage Pool: What it is, How it Works, Benefits

What Is a Mortgage Pool?

A mortgage pool is a group of mortgages held in trust as collateral for the issuance of a mortgage-backed security. Some mortgage-backed securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae are known as "pools" themselves. They are also known as "pass-throughs" and trade in the TBA forward market.

A mortgage pool is a group of mortgage loans held as collateral in a trust for the issuance of mortgage-backed securities.

Key Takeaways

• Mortgage pools tend to have similar characteristics, such as issuance date and maturity date.
• Mortgage-backed securities are backed by mortgages with similar characteristics, while collateralized debt obligations are backed by collateral with varying characteristics.
• Mortgage pools provide investors with diversification.
• Mortgage pools can focus on certain characteristics, such as property type, which can cause varying risks and returns.

Understanding a Mortgage Pool

Mortgage pools comprise mortgages with similar characteristics, such as maturity date and interest rate. Once a lender completes a mortgage transaction, it usually sells the mortgage to another entity, such as Fannie Mae or Freddie Mac. Those entities then package the mortgages into a mortgage pool, which acts as collateral for a mortgage-backed security.

Mortgage-backed securities are collateralized by a mortgage pool filled with similar mortgages, while a collateralized debt obligation (CDO) is collateralized by a pool of loans with varying characteristics, such as maturities, regions, interest rates, or credit ratings. A CDO pools cash flow-generating assets and repackages them into discrete tranches that can be sold to investors. A pool of mortgages that backs a more complex mortgage-backed security or CDO might consist of mortgages with varying interest rates and characteristics.

Analysts and investors can use the weighted average coupon (WAC) to calculate the average gross interest rate of all the mortgages in the pool.

Benefits of a Mortgage Pool Fund

Mortgage pool funds are good for investors seeking real estate exposure because they are a low-risk investment that moves independently of stocks and bonds and offers a predictable monthly income. Mortgage pool fund loans are secured by real estate and are referred to as hard money loans because they consider the value of the underlying property, rather than relying solely on the borrower’s creditworthiness.

Terms for hard money loans are shorter than most mortgages, ranging from a few months to three years, while conventional mortgages have 10- to 30-year terms. Because of their shorter terms, hard money loans are less susceptible to interest rate swings, resulting in a more predictable and reliable cash flow.

Mortgage pool funds vary in focus, with some specializing in specific property types, while others are more general. These differences can impact risk and return, so it is important to research the different mortgage pools before investing. Factors to consider include the geographic focus of the portfolio, property type and lien position, underwriting criteria, liquidity, and management experience.