Pool factor refers to the amount of the initial principal of the underlying mortgage loans that remain in a mortgage-backed security transaction. It is expressed as a factor of one that is used to indicate the remaining principal balance. Pool factors are only used to describe specific classes of securities, namely pooled asset-backed securities (ABSs) and mortgage-backed securities (MBSs) whose component payments are returned to investors on a monthly basis. Pool factors are published monthly in the US for Ginnie Mae, Fannie Mae, and Freddie Mac mortgage-backed securities.
Here are some of the applications of pool factor in securitisation:
- Calculating the value of an ABS: The value of an ABS is typically calculated based on the present value of the pool factor. This is because the pool factor represents the amount of principal that is still outstanding on the underlying assets.
- Managing the risk of an ABS: The risk of an ABS can be managed by considering the pool factor. For example, if the pool factor is declining, this could indicate that the underlying assets are becoming less valuable.
- Understanding the performance of an ABS: The performance of an ABS can be tracked by monitoring the pool factor. If the pool factor is declining, this could indicate that the ABS is performing poorly.
Here are some examples of how pool factor is used in securitisation:
- In a mortgage-backed security (MBS), the pool factor is used to calculate the amount of principal that is still outstanding on the underlying mortgages.
- In a collateralized debt obligation (CDO), the pool factor is used to calculate the amount of principal that is still outstanding on the underlying loans.
- In a synthetic securitization, the pool factor is used to calculate the amount of principal that is still outstanding on the underlying reference assets.