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. These are the simplest form of mortgage-backed security. They are also known as "pass-throughs" and trade in the to-be-announced (TBA) forward market.
A mortgage pool is a group of mortgage loans held as collateral in a trust, usually for the issuance of mortgage-backed securities.
- Mortgage pools, which are groups of mortgages, tend to have similar characteristics, such as issuance date, maturity date, etc.
- While mortgage-backed securities are backed by mortgage collateral with similar characteristics, collateralized debt obligations are backed by collateral with varying characteristics.
- An important benefit of mortgage pools is that they 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 are comprised of mortgages that tend to have similar characteristics—for instance, they will usually have close to the same 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 together into a mortgage pool and the mortgage pool then 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. A CDO is a structured financial product that pools together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors. A collateralized debt obligation is named for the pooled assets—such as mortgages, bonds and loans—that are essentially debt obligations that serve as collateral for the CDO. A pool of mortgages that backs a more complex mortgage-backed security or CDO, however, might consist of mortgages of more varying interest rates and characteristics.
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 a stock and bonds and offer a predictable monthly income. Mortgage pool fund loans are secured by real estate and are referred to as hard money because unlike most bank loans (which rely on the creditworthiness of the borrower), hard money loans consider the value of the underlying property.
Terms for hard money loans are shorter than most mortgages; they range 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 being affected by interest rate swings, which means it is a more predictable and reliable cash flow.
Like mentioned above, mortgage pool funds vary, where some focus on specific property types, while some are more general. These difference can impact risk and return, so it is important to research the different mortgage pools before diving in. Things to consider when choosing which mortgage pool fund to invest in include the geographic focus of the portfolio, property type and lien position, underwriting criteria, liquidity, and management experience