Jumbo Pool

Categories: Bonds

That really big house with the really big pool you went to a few times as a kid. The jumbo pool. The pool like no other.

Once you grow up, a new kind of jumbo pool catches your eye: the Ginnie Mae II mortgage-backed security (MBS) multi-issuer pool.

Now we’re talking.

Jumbo pools are the next level in the financial evolution of MBSs. We started with single-issuer pools, which place a bunch of similar mortgages together, all by the same bank. Jumbo pools have more than one issuer, and they’re huge. Investors like jumbo pools because they’re so big, which means you can get great diversity and shared risk. If you invest in a jumbo pool, you’ll get principal and interest payments every year or so from the borrowers whose mortgages are in the jumbo pool.

Investing in a jumbo pool may sound fun...but it’s not so much if too many borrowers in the pool refinance, i.e. pay off their entire mortgage, or pay off their mortgage quickly. These are the risks that come with investing in MBSs in general.

Good for them, anti-climactic for you.

Related or Semi-related Video

Finance: What is Collateralized Mortgage...65 Views

00:00

Finance a la shmoop what is a collateralized mortgage obligation or

00:07

CMO all right people well this is a GMO and this is a CMO yeah it's a bunch of

00:17

mortgages in one investment vehicle pot like mortgage Stone Soup not nearly as [Mortgage stones in a bowl of soup]

00:24

exciting is that that man-eating plant over there

00:27

so yeah just a bunch of mortgages that are packaged together when banks and

00:30

investors package mortgages together well they can treat them like they're a

00:34

big fat indexed bond fund because these groups of mortgages while they pay

00:39

interest ie the interest comes from the people who are actually paying off their

00:43

mortgages so why would you collateralize a mortgage obligation anyway answer risk

00:49

by packaging lots and lots of mortgages together the theory was that well as a [CMO boxes on a conveyor belt]

00:53

whole they would create a much less volatile environment than the former

00:58

alternative of having tens of thousands of individual mortgages many of which at

01:02

any given time were you know in do rest as people were dead beating and not [Man playing video games]

01:07

paying what they promised to pay back right well collateralizing this group

01:11

meant simply placing all of them into one investment vehicle that could be

01:15

bought and sold as if it were in ETF or individual closed end fund but Wall

01:20

Street being Wall Street where greed is good until it's not abused the notion of [Boxing gloves punch collateralized]

01:26

collateralized mortgages and actually applied the notion of collateral against

01:31

them pledging as collateral the equity in these mortgages or packages of

01:37

mortgages and then borrowing against them so it's like leverage on leverage,

01:42

highly volatile and this is sort of like the brilliant idea of the fraternity [Man walking along]

01:46

social chairman sending the pledges to get graham crackers marshmallows and

01:50

chocolate when he sees his you know couch is on fire yeah like why wouldn't [People carrying snacks and a couch on fire appears]

01:54

he just put it out like what was he imbibing there all right well in fact

01:58

this is more or less what happened in the mortgage meltdown of 2008 and 9 and

02:03

it was helium inside of the couch that exploded in the form of many of these [Helium explodes on a couch]

02:08

mortgages becoming insolvent and as one mortgage went bad

02:12

well it caused a chain reaction of panic up and down the economic food chain

02:17

which resulted in the near bankruptcy of the United States financial system

02:21

basically the people who pulled together these CMOS forgot what the O stands for [Man walking along the street and plant eats him]

02:27

oh dear, oh my

Find other enlightening terms in Shmoop Finance Genius Bar(f)