Pool Factor

Let’s talk asset-backed securities. Or ABS, 6-packs. We know them, we love them, and if we’re smart about it, we can even make a little money off them. But when it comes to asset-backed securities like MBSs (mortgage-backed securities), it’s helpful to understand a little something called the pool factor. The “pool factor” is the current principal amount of the security divided by its original principal amount, and its whole purpose in life is to tell us how much value is left in that security.

When something like an MBS first starts out, its current principal and original principal value are equal. In other words, the pool factor is "one." As the folks who own those mortgages pay down the balance, the pool factor decreases. The closer it is to zero, the closer the security is to being paid off in full. Once a month, institutions like Freddie Mac and Ginnie Mae publish pool factor info, and it typically shows up as a five-digit decimal.

For example, if we’ve got an MBS worth $250,000 and its pool factor is 0.2375, then we know that the remaining balance is $59,375. We can then compare this to the MBS’s forecasted repayment schedule and see if it’s on track, or if there are any potential red flags we should be concerned about.