The pooling factor is the proportion of an asset-based or mortgage-backed security that has not been returned to investors, indicating the amount of collateral remaining. It is used to assess value and risk, with a lower factor indicating faster repayment and increased risk.
The pooling factor is the proportion of the balance of a particular type of security that has not yet been returned to the investor. The figure is only used for particular types of asset-based and mortgage-backed securities. The group factor can serve as an indicator of the amount of collateral remaining in these securities.
An asset-based security is one in which the holder receives income from the assets that make up the security. Typically this is a collection of multiple small assets that an investor would not normally want to purchase individually. In turn, most of these securities are pooled, which means they are divided among multiple investors.
The best-known type of security is mortgage-backed security. This is when investors buy the rights to receive the income from mortgage holders’ payments. Banks will pool multiple mortgages in this way and sell the rights to receive the payments. Investors will typically pay less for the security than the total income they should eventually earn. Of course, they also bear the risk that some mortgage holders will default on their payments.
The group factor simply indicates how much of the original loans covered by the guarantee have not yet been repaid. The factor is displayed as a ratio of 1, similar to a baseball hit rate. That means, for example, that if half of the total amount has not yet been repaid, the pooling factor appears as .500. Multiplying the pool factor by the original pool balance will show how much is left to pay.
Within the United States, a common factor is published each month for Ginnie Mae, Fannie Mae, and Freddie Mac mortgage-backed securities. These are government-backed companies that issue the majority of mortgage-backed securities. Government backing offers some degree of guarantee that investors will receive a payment.
There are several uses of the grouping factor. One is to let potential investors know how much “value” is left in a particular part of the pool. This can help them assess a fair price if they want to buy out another investor’s share.
Another use of the pooling factor is to take into account the collateral of the loans, that is, the properties covered by the mortgages. If the factor is lower at any particular stage than would normally be expected, it may indicate that there has been a faster repayment of the mortgages. In turn, this increases the likelihood that some mortgages have been repaid in full. This would reduce the number of properties covered by the pool and therefore increases the proportional risk posed if any mortgage holder defaults on their payments.
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