What is a 'Pool Factor'

 

The pool factor is a measure of how much of the original loan principal remains in an asset-backed security (ABS). The pool factor is most strongly associated with mortgage-backed securities (MBS), which gather mortgages together into a pool and sell them off to investors. The pool factor is expressed as a numerical factor between 0 and 1. All mortgage-backed securities start life with a pool factor of 1 and it will move towards zero (total payment) over time as payments on the underlying mortgages come in. If 50% of the total original value of an MBS is paid off, the pool factor will be 0.500. The pool factor is calculated by dividing the outstanding principal value (current face) by the original principal balance (original face):

Pool Factor = Outstanding Principal Balance / Original Principal Value

BREAKING DOWN 'Pool Factor'

 

The pool factor for Freddie Mac (FHLMC), Fannie Mae (FNMA) and Ginnie Mae (GNMA) issued mortgage-backed securities are published on a monthly basis. It is essentially a measure of how much value is left inside a MBS. When a MBS is created, there is a planned schedule of payments that line up with a forecasted pool factor at various phases in the life of the MBS. If the pool factor is declining faster than expected, it could mean that refinancing and early repayment is an issue in that particular MBS. This can be a red flag for investors as it usually means there are less properties serving as collateral for that particular MBS compared to others where the pool factor is shrinking as projected.

Calculating the Pool Factor

The pool factor is listed as a 5 digit figure in most cases and it is very easy to work with. If the original face amount of a pooled MBS is $100,000 and the pool factor released that month is 0.4587, then the remaining balance in the security yet to be paid to the investor would be $45,870. That $45,870 is the current face of the MBS, and you can get the original face ($100,000) by dividing it by the pool factor.

Despite being a bastion of basic math in the complex world of securitization, the pool factor isn’t particularly useful without context. Investors watch the changes in the pool factor for any signs that the model upon which the MBS is built is in trouble. As with any structured security, the original assumptions can shift resulting in an imbalance in the risk reward tradeoff that was originally envisioned. That shift, in turn, can lead to the security being worth more or less than the investor originally paid for it. In short, the pool factor is one of the key data points an investor will watch when trying to evaluate the fair market price of a mortgage-backed security.

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