Jumbo Pool
Candlefocus EditorJumbo pools are the largest and most liquid form of mortgage-backed securities (MBS). A jumbo pool is a pass-through Ginnie Mae II mortgage-backed security that is collateralized by mortgages from multiple issuers. They are issued by Ginnie Mae and are made up of thousands of “conforming”, or lower-risk, loans from various institutions. There are several different varieties of jumbo pools, including those backed by conventional mortgages, such as conforming loans and loans backed by the Federal Housing Administration (FHA).
Mortgage-Backed Securities (MBS) are ideal for portfolio diversification because jumbo pools are not limited to only one geographic area like residential mortgages are. In other words, investors can create a portfolio of jumbo pools with mortgages from all around the United States. This offers investors a number of benefits, including reducing the effect of changes in local market conditions (such as declining or rising house values) on the performance of the investment. Moreover, jumbo pools offer greater liquidity than other types of MBS.
Jumbo pools are typically less risky than other mortgage-backed securities because they are backed by mortgages from a variety of different institutions – unlike conforming loans, which are backed by a single issuer. Therefore, investors benefit from the diversification of loan quality and loan originators in a jumbo pool.
However, as with any investment, there are also risks associated with jumbo pools. These include the possibility of borrowers refinancing loans at lower rates, which could lead to early payment to mortgages. Additionally, there is a natural shrinking of the principal payment as loans in the jumbo pool are paid off. Despite these risks, jumbo pools are often seen as a safer form of MBS investment due to their predictable and less volatile payment streams.
Overall, investors should consider jumbo pools when looking for a portfolio diversifier with a high degree of liquidity. While these pass-through securities have their downsides, the diversification benefits and relatively low degree of risk can make them an attractive choice for many investors.