Pool Factor
What Is the Pool Factor?
The pool factor is a measure of the amount of the original loan principal stays in a asset-backed security (ABS). The pool factor is generally unequivocally associated with mortgage-backed securities (MBS), which gather mortgages together into a pool available to be purchased to investors. The mortgage payments are gone to the investor until the loan is paid off.
The pool factor is communicated as a mathematical factor somewhere in the range of zero and everyone mortgage-backed securities start life with a pool factor of one. They then advance toward zero (total payment) over the long run as payments are made on the underlying mortgages. If half of the total original value of a MBS is paid off, the pool factor will be 0.500. The pool factor is calculated by partitioning the outstanding principal balance (current face) by the original principal balance (original face).
Understanding the Pool Factor
The pool factor for mortgage-backed securities is issued by Freddie Mac (FHLMC), Fannie Mae (FNMA), and Ginnie Mae (GNMA) consistently. It is basically a measure of how much value is left inside a MBS. At the point when a MBS is made, there is an arranged schedule of payments that lines up with a guage pool factor at different phases in the life of the MBS. This assists an investor with deciding the value of the MBS before choosing to invest in it as well as deciding the risk of the MBS.
For instance, assuming the pool factor is declining surprisingly quick, it would show early repayments of mortgages. This can be a red flag for investors, as it generally means that there are less real home properties filling in as collateral for that specific MBS as certain mortgages have been paid off in full. Less properties would mean an increase in the relative risk in the event that one mortgage defaults.
Working out the Pool Factor
The formula is addressed as follows:
- Pool factor = Outstanding principal balance/original principal balance
Assuming that the original face value of a pooled MBS is $100,000 and the pool factor delivered that month is 0.6325, then, at that point, the excess balance in the security is $63,250. That $63,250 is the current face of the MBS. You can show up at the original face ($100,000) by isolating the current face by the pool factor.
Benefits of the Pool Factor
Notwithstanding being a simple calculation, the pool factor isn't especially valuable without setting. Investors watch the changes in the pool factor for any difficult situations in the model whereupon the MBS is assembled.
Similarly as with any structured security, the original suppositions can shift bringing about an imbalance in the risk-return tradeoff that was originally imagined. That shift, thus, can lead to the security being worth pretty much than the investor originally paid for it. The pool factor is one of the key data points an investor will watch while attempting to assess the fair market price of a mortgage-backed security.
Features
- The pool factor decides the value of an ABS.
- The pool factor measures how much outstanding of the original loan principal remains.
- Pool factors range from zero to one, beginning at one when the loan starts and completing at zero when it is fully paid off.
- Pool factors are most normally calculated on a MBS.
