Jumbo Pool (Mortgages) - Explained
What is a Jumbo Pool of Mortgages?
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What is a Jumbo Pool?
A Jumbo Pool is a set of similar mortgage loans from different mortgage lenders. It is a diversified mortgage-backed security made available to investors on the open market. Jumbo pools have an edge over single-issuer pools because they are sets of mortgages realized from different lenders who might belong to different geographical locations.
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How Does a Jumbo Pool Work?
The collateralization of a Jumbo look stems from the fact that it is diffused on the open market, this means that shares of the pool are sold to investors on the open market. The shares offered are just like bonds, investors receive principal and interest payments on the purchased shares. The are safe mortgage-backed securities or investments. Interests are paid to investors annually or bi-annually by a central paying agent.
Risk Associated With Jumbo Pools
There are certain risks that are attributable to jumbo pools. Given the fact that a Jumbo Pool is a set of diversified mortgage loans from different lenders, if one of the mortgage loans is paid earlier than the scheduled time, it can pose a threat. In this case, investors are at risk. Early payment of mortgage loans could be as a result of decrease in unsteady rates. Contraction of principal payment in jumbo pools is another risk of the pool. Once the size of the principal shrinks, the interest rate also declines. Every investment has its risks, although the level of risks vary from one investment to another. Jumbo pools are however less risky than other types of mortgage pools, especially the traditional pool. In the actual sense, jumbo pools as diversified pools mitigate investment risks. This type of pool reduce the rate at which debtholders default on payment of loans.