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The pool factor is the proportion of the balance of a particular type of security which has yet to be returned to the investor. The figure is only used for particular types of asset-based and mortgage-backed securities. The pool factor can serve as an indicator of how much collateral remains in these securities.
An asset-based security is one in which the holder receives income from the assets which make up the security. These will usually be a collection of multiple small assets that an investor would not normally want to take on individually. In turn, most of these securities are pooled, meaning they are split among multiple investors.
The best known type of security is the mortgage-backed security. This is when the investors buy the rights to receive the income from payments by mortgage holders. Banks will gather together multiple mortgages in this way and sell off the rights to receive the payments. Usually investors will pay less for the security than the total income they should eventually earn. Of course, they also take on the risk that some mortgage holders won't make their repayments.
The pool factor simply states how much of the original loans covered by the security have yet to be repaid. The factor is displayed as a proportion of 1, in similar fashion to a baseball hit rate. That means, for example, that if half the total amount has yet to be repaid, the pool factor is listed as .500. Multiplying the pool factor by the original balance of the pool will show how much remains to be paid.
Within the United States, a pool factor is published each month for mortgage-backed securities from Ginnie Mae, Fannie Mae and Freddie Mac. These are government supported companies which issue the majority of mortgage-backed securities. The government backing gives some degree of guarantee that investors will get paid.
There are several uses of the pool factor. One is to allow potential investors to know how much "value" is left in a particular share of the pool. This can help them assess a fair price if they want to buy out another investor's share.
Another use of the pool factor is for taking account of the collateral of the loans, namely the properties covered by the mortgages. If the factor is lower at any particular stage than would normally be expected, it may indicate there has been a faster repayment of mortgages. In turn, this increases the likelihood that some mortgages have been repaid in full. This would reduce the number of properties covered by the pool and thus increases the proportionate risk posed if any mortgage holder defaults on their payments.
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