What Is a Jumbo Pool?
A jumbo pool is a pass-through Ginnie Mae II mortgage-backed security (MBS) that is collateralized by multiple-issuer pools. These pools combine mortgage loans with similar characteristics and are larger than single-issuer pools. The mortgages contained in jumbo pools are more diverse geographically compared to those in single-issuer pools.
Key Insights
- A jumbo pool is a Ginnie Mae II pass-through MBS, secured by multiple-issuer pools.
- ‘Ginnie Mae’ refers to the Government National Mortgage Association (GNMA).
- Jumbo pools provide predictable and less volatile principal and interest payments, making them a safer MBS investment.
- Primary risks include early repayment of mortgages and the gradual shrinkage of principal payments as loans are paid off.
- Jumbo pools lack geographical constraints.
Understanding Jumbo Pools
Jumbo pools comprise groups of mortgage loans from multiple lenders, securitized by selling pool shares on the open market to investors. Investors purchase these securities to receive consolidated principal and interest payments, typically either annually or biannually.
Interest rates on mortgage loans within jumbo pools may vary up to one percentage point, providing predictable and less volatile payment streams for investors. Backed by multiple issuers, these pools generally offer a safer form of MBS investment compared to single-issuer pools.
Creating a Jumbo Pool
The process begins when an accredited lender applies for a commitment from Ginnie Mae to guarantee the securities. The lender originates or acquires the mortgage loans, assembling them into a mortgage pool with diverse geographical roots.
After compiling the mortgage set, the lender selects potential buyers for the security and submits the required documentation to Ginnie Mae for a specialized pool processing agent. Once approved, the agent prepares and delivers the securities to investors designated by the lender. The lender remains responsible for selling the securities and managing the underlying mortgages.
The Advantages of Jumbo Pools
Lower Risk than Traditional Mortgage Pools
Jumbo pools generally bear less risk than an individual lender’s mortgage pools despite inherent risks in MBS. Geographical diversification provides varied economy coverage, reducing potential defaults due to regional economic downturns or localized natural disasters.
Thus, jumbo pools are less susceptible to local economic conditions than single-lender mortgage pools. Additionally, these pools contain loans with different degrees of governmental guarantees, providing multiple layers of security.
Risks Linked to Jumbo Pools
Early Payment Risks
Early mortgage repayment poses a risk to investors in jumbo pools. Mortgage holders might repay their loans early due to extra payments, selling homes, or refinancing old loans when interest rates drop.
Shrinkage of Principal
A natural reduction in the principal occurs as the loans in the jumbo pool are paid, which in turn reduces the corresponding interest payments. For example, if the principal is $10,000 at a 6% rate, the interest is $600. If $100 of the principal is prepaid, the next interest payment will be 6% of $9,900 ($594).
These risks are akin to those affecting all MBS investors and are not unique to jumbo pools alone.
Differentiating Jumbo Mortgages from Regular Mortgages
Jumbo and regular mortgages primarily differ based on the property’s value. Typically, jumbo mortgages are utilized for high-value property acquisitions, whereas conventional mortgages cater to average homebuyers purchasing less expensive homes. Regular mortgages fall under Federal Housing Finance Agency (FHFA) loan size restrictions.
What Is a Pass-Through Security?
A pass-through security is a pool of fixed-income securities backed by assets like mortgages. Each security in the pool represents a collection of debts, including mortgages or car loans.
Types of Mortgage-Backed Securities
Common types of MBS include pass-through securities and collateralized mortgage obligations (CMOs). Pass-through securities, structured as trusts, collect and distribute mortgage payments to investors. CMOs, composed of tranches, come with specific credit ratings and rates returned to investors.
Conclusion
Jumbo pools are formidable pass-through securities backed by multiple-issuer pools, offering a safer investment vehicle due to their geographical and diversified mortgage portfolios. Though subject to risks such as early payments and shrinking principal, they present a less volatile investment choice compared to single-issuer pools.
Related Terms: Mortgage-Backed Securities, Pass-Through Security, Jumbo Mortgage, Collateralized Mortgage Obligations.
References
- U.S. Department of Housing and Urban Development. “Ginnie Mae II MBS”.
