Mortgage Pass-Through Mechanics and Pool Factors

Every month, a pass-through does exactly one job: whatever the underlying mortgages collected, hand it straight to investors in proportion to what they own, minus a small fee for servicing. There is no reinvestment, no active management, no discretion — the security is a pipe, and the pool factor is the gauge on that pipe telling you how much of the original loan balance is still flowing through it.

What moves the pool factor

A pool factor drops for two reasons that look identical on a statement but mean very different things:

• Scheduled amortization — the small sliver of principal built into every level mortgage payment, present even if no one prepays a dime. Slow, predictable, present every month.
• Prepayment — unscheduled principal from refinancing, home sales, or (for agency pools) defaults that the guarantor pays off at par. Lumpy, driven by interest rates and housing turnover, and the dominant source of principal once rates move.

A newly issued pool factor of 0.9850 after one month could mean either "everyone is paying on schedule and 1.5 percent amortized normally" or "amortization alone would only have produced 0.1 percent, and 1.4 percent came from prepayments." You cannot distinguish these from the factor alone — you need the CPR.

Worked example: reading a factor drop

A $50 million original-face pool has a pool factor of 0.9200 this month, down from 0.9312 last month. Outstanding balance this month is $50{,}000{,}000 \times 0.9200 = 46{,}000{,}000$, versus $50{,}000{,}000 \times 0.9312 = 46{,}560{,}000$ last month — total principal paid down was $560,000.

Suppose the pool's scheduled amortization on a balance near $46.56 million, at a 5.5 percent coupon amortizing over the remaining term, works out to about $95,000 for the month. Subtracting that from the total leaves $560{,}000 - 95{,}000 = 465{,}000$ of prepayment — the vast majority of the paydown. Converting that to an SMM against last month's balance: $465{,}000 / 46{,}560{,}000 \approx 0.00999$, close to 1 percent SMM, which annualizes to roughly a 12 percent CPR. This is the kind of back-of-envelope check every MBS desk runs before trusting a vendor's reported prepayment speed.

Worked example: valuing a position from the factor

An investor holds $10 million original face of a pool now trading at a price of 101-16 (101 and 16/32, or 101.5) with a current pool factor of 0.7400. The market value is not $10 million times the price — it is the remaining face times the price:

$$10{,}000{,}000 \times 0.7400 \times 1.015 = 7{,}511{,}000$$

So the position is worth about $7.51 million, not $10.15 million — a mistake worth almost $2.6 million if the factor is ignored. This is the single most common operational error a junior desk assistant makes on an MBS blotter: quoting price against original face instead of current face.

Where you meet it in practice

Pool factors are published monthly by the agencies (Fannie Mae, Freddie Mac, Ginnie Mae) and are the first input into every MBS trade ticket, every dollar-roll calculation, and every CPR back-calculation a desk runs. Getting comfortable converting between original face, factor, and current face — and separating amortization from prepayment inside a factor drop — is table-stakes arithmetic for anyone touching agency MBS, from a settlements clerk to a portfolio manager.