Definition
A Mortgage Pool is a collection of mortgage loans that have similar characteristics, grouped together to be sold as a unit in the secondary market or used as collateral to back a security. These securities can then be sold in the capital markets, attracting investors who choose to invest in such pools. Commonly, loans within a mortgage pool share features such as similar interest rates, maturity dates, and borrower credit profiles.
Examples
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VA Guaranteed Loans: Lenders Mortgage Company could package a mortgage pool consisting of $50 million worth of VA guaranteed loans. This pool is then sold to a group of investors, each contributing a minimum of $25,000.
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Residential Mortgage Loans: A financial institution can group together a pool of residential mortgages, amounting to $100 million, each with a 30-year term and fixed interest rate. This pool might then be used to back a mortgage-backed security sold to institutional investors.
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Commercial Property Loans: A mortgage pool could consist of a number of commercial property loans, including office buildings and shopping malls, packaged together to create a diversified income stream for investors purchasing shares in the pool.
Frequently Asked Questions (FAQs)
Q1: Why are mortgage pools created?
- A1: Mortgage pools are created to provide liquidity to lending institutions, allowing them to free up capital to issue more loans. They also help spread and neutralize risk by pooling various loans together and attracting investment through commercialization.
Q2: What types of loans can be found in a mortgage pool?
- A2: A mortgage pool typically comprises loans that have similar characteristics such as interest rates, terms, and borrower credit profile. Common types of loans include residential mortgages, commercial property loans, and VA guaranteed loans.
Q3: How do investors benefit from mortgage pools?
- A3: Investors benefit from mortgage pools by gaining exposure to diversified mortgage loan portfolios with relatively lower risk as compared to individual loans. The regular interest payments made on the underlying loans provide a steady income stream.
Q4: What is the role of Collateralized Mortgage Obligations (CMOs) in mortgage pools?
- A4: CMOs are one of the financial instruments backed by mortgage pools. They are structured to offer different classes of maturity and risk, catering to different investor needs and risk appetites.
Related Terms
- Collateralized Mortgage Obligation (CMO): A complex type of mortgage-backed security that divides the pool of mortgages into tranches, varying by maturity and risk profile.
- Secondary Market: A marketplace where financial instruments like mortgage loans and mortgage-backed securities are bought and sold after the original issuance.
- Mortgage-Backed Security (MBS): A type of asset-backed security secured by a collection of mortgages.
- Loan Servicing: The process of managing and collecting mortgage payments from borrowers, which may entail administrating the loans in a mortgage pool.
Online Resources
- Investopedia: Mortgage Pool Explained
- U.S. Securities and Exchange Commission (SEC): Mortgage-Backed Securities Information
- Federal Housing Finance Agency (FHFA): FAQ on Mortgage-Backed Securities
References
- Fabozzi, Frank J. “The Handbook of Mortgage-Backed Securities.”
- Gorton, Gary. “The Origin of the Financial Crisis.”
- Green, Richard K. & Wachter, Susan. “The American Mortgage in Historical and International Context.”
Suggested Books for Further Studies
- “The Handbook of Mortgage-Backed Securities” by Frank J. Fabozzi
- “Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman and Angel Serrat
- “The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It” by Robert J. Shiller
Real Estate Basics: Mortgage Pool Fundamentals Quiz
### What is the primary purpose of creating a mortgage pool?
- [ ] To increase the interest rates on loans
- [ ] To concentrate all risks in one basket
- [x] To provide liquidity to lending institutions
- [ ] To reduce administrative burdens of mortgage loans
> **Explanation:** Mortgage pools are created primarily to provide liquidity to lending institutions, allowing them to free up capital for issuing more loans.
### Which characteristic is NOT typically considered when grouping loans into a mortgage pool?
- [ ] Interest rates
- [ ] Maturity dates
- [ ] Borrower credit profiles
- [x] Geographic location of loans
> **Explanation:** Geographic location of loans is not typically a primary characteristic when grouping loans into a mortgage pool. Interest rates, maturity dates, and borrower credit profiles are more typically considered.
### What is a Collateralized Mortgage Obligation (CMO)?
- [ ] A type of unsecured loan
- [x] A complex mortgage-backed security with tranches
- [ ] A government-issued bond
- [ ] A type of commercial loan
> **Explanation:** A CMO is a type of complex mortgage-backed security that is divided into tranches with varying risk profiles and maturity dates.
### Who ultimately purchases the securities backed by a mortgage pool?
- [ ] First-time home buyers
- [ ] Real estate agents
- [x] Investors in the capital markets
- [ ] Homebuilders
> **Explanation:** Investors in the capital markets ultimately purchase the securities backed by mortgage pools, gaining exposure to mortgage loan portfolios.
### What is a common advantage for investors who invest in mortgage pools?
- [ ] Direct ownership of properties
- [x] Diversification and consistent income stream
- [ ] Guaranteed profits
- [ ] Avoidance of any risk
> **Explanation:** Investors benefit from mortgage pools through diversification and a steady income stream from the interest payments on the underlying loans.
### Which entity commonly organizes and packages mortgage pools?
- [x] Lenders and financial institutions
- [ ] Federal government
- [ ] Real estate developers
- [ ] Individual property owners
> **Explanation:** Lenders and financial institutions commonly organize and package mortgage pools, facilitating sales in the secondary market.
### Are mortgage pools used exclusively for residential loans?
- [ ] Yes
- [ ] No, only commercial loans are included
- [x] No, both residential and commercial loans can be included
- [ ] It depends on the market conditions
> **Explanation:** Mortgage pools can include both residential and commercial loans with similar characteristics.
### The process of handling and collecting mortgage payments is known as:
- [ ] Loan origination
- [ ] Mortgage securitization
- [x] Loan servicing
- [ ] Interest accrual
> **Explanation:** The process of managing and collecting mortgage payments from borrowers is known as loan servicing.
### Which agency provides extensive information on mortgage-backed securities?
- [x] U.S. Securities and Exchange Commission (SEC)
- [ ] Federal Bureau of Investigation (FBI)
- [ ] Consumer Financial Protection Bureau (CFPB)
- [ ] Department of Housing and Urban Development (HUD)
> **Explanation:** The U.S. Securities and Exchange Commission (SEC) provides extensive information and regulations related to mortgage-backed securities.
### The secondary market is critical for what aspect of mortgage pools?
- [ ] Determining property values
- [ ] Conducting property transactions between buyers and sellers
- [x] Facilitating the sale of bundled mortgage loans to investors
- [ ] Managing tenant relationships in rental properties
> **Explanation:** The secondary market is critical for facilitating the sale of bundled mortgage loans to investors, delivering liquidity to lending institutions.
