What is a Whole Pool

A whole pool is an undivided interest in a group of mortgages held in trust as collateral for the issuance of a mortgage-backed security. It differs from a partial or fractional interest in a pool of mortgages underlying a mortgage-backed security.

The owner of a pass-through security backed by a whole pool retains all the upside potential associated with the underlying mortgages, as well as all the related risks. Conversely, both upside potential and downside risks are shared among owners of fractional pools.

Breaking Down Whole Pool

A whole pool usually is run by a manager, as is the case with divided or fractional pools. This individual or organization creates the security structure and collects the underlying mortgage payments in exchange for a fee. Collection of these payments generally determines the return of the security related to the pool, as does the rate of mortgage prepayments.

Note that owning a pass-through certificate does not mean that the holder owns the whole pool. It only means that the holder is entitled to any income earned from this pool.

Whole pools, like most mortgage pools, typically include mortgages with similar characteristics, such as similar maturities and interest rates.

Note that once a lender completes a mortgage transaction, it usually sells the mortgage to another entity, such as Fannie Mae or Freddie Mac. These entities then package the mortgages together into a mortgage pool and the mortgage pool then acts as collateral for a mortgage-backed security. However, while Fannie and Freddie do control whole pools of mortgages, this term generally refers to investment banks that control underlying mortgages and organize a security for a particular investor.

Pros and Cons of a Whole Pool

Securities backed by whole pools help investors gain real-estate exposure. They also are fairly conservative fixed-income investments that, except in times of market peril, generally provide fairly regular monthly coupon payments. Additionally, they offer diversification, even among other fixed-income investment such as Treasuries, corporate credit and sovereign bonds. Moreover, much like other fixed-income investments, they tend not to be correlated with stocks.

Exposure to securities backed by whole pools reduces management fees, in some cases. It also allows investors to carefully tailor exposure to certain types of mortgages, including by rate, region, or perceived prepayment risk. A whole pool also relies less on ratings agencies to determine the underlying quality of the pool’s loans.

Some large institutional investors own multiple securities backed by whole pools and diversify risk based on the types of exposures in each pool.

Certain whole pools focus on specific property types, while some are more general. These difference can impact risk and return.

The downside of whole pools, of course, is that the onus of all the due diligence related to default, market risks and liquidity risks all falls squarely on the investor in the related security.