Mortgage pools are groups of mortgages that are used as the collateral or backing for some type of mortgage-backed security. In many cases, this group of mortgages that are used to back the security will carry similar interest rates and maturity dates. There is also the possibility that the mortgage pool will be composed of mortgages that carry a wide range of maturity dates. In addition, the interest rates may vary, both in amount and in the type of rate that is applied.
Investors can buy into the mortgage pool by investing in the security that is backed by that group of mortgages. In exchange for the investment, each investor receives a return that is based on the income generated from the payments received on those mortgages. This type of return is usually referred to as a pass-through rate, since it is connected directly with the return generated by each mortgage loan in the pool. Depending on the provisions that apply to the security, those payments may be received monthly, quarterly, or annually.
A simple mortgage pool will be composed of a group of mortgages that are very similar to one another. For example, the pool may include mortgages that are written on properties located in the same city or town. Those mortgages may all carry a fixed rate of interest, and be scheduled for payoff within four to six months of one another. With this model, managing the security that is backed with the pool is relatively uncomplicated, since there are fewer variables to consider.
There are examples of pools that include mortgage loans that are more eclectic. A mortgage pool may contain mortgages that carry both flexible as well as fixed rates of interest. In addition, the maturity dates of the mortgages may vary by a calendar year or more. Some pools will also include a combination of mortgages on commercial as well as residential properties.
A mortgage pool may be used to back a security issued by a government entity or a private organization. Laws and regulations related to the creation and sale of these securities vary somewhat from one country to another, including provisions on what type of return an investor can expect over the life of the security. For this reason, investors should work closely with a financial professional to determine if a particular mortgage-backed security is a viable investment for the particular investor, and is likely to yield a return that the investor feels is worth his or her participation.
