What is the 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 for sale 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 then move toward zero (total payment) over time as payments are made on the underlying mortgages. 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 balance (current face) by the original principal value (original face):
Pool Factor = Outstanding Principal Balance / Original Principal Value
BREAKING DOWN Pool Factor
The pool factor for mortgage-backed securities issued by Freddie Mac (FHLMC), Fannie Mae (FNMA) and Ginnie Mae (GNMA) is published on a monthly basis. It is essentially a measure of how much value is left inside an MBS. When an MBS is created, there is a planned schedule of payments that lines 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 are issues in that particular MBS. This can be a red flag for investors, as it usually means there are fewer properties serving as collateral for that particular MBS compared with other MBS 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 is very easy to work with. If the original face value 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 the current face 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 of trouble in the model upon which the MBS is built. As with any structured security, the original assumptions can shift resulting in an imbalance in the risk-return 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.