Jumbo Pool

Definition

A Jumbo Pool is a financial term referring to a group of mortgages with a higher than standard principal amount packaged together as a single unit for investment purposes. These mortgages are called “jumbo loans,” usually exceeding the maximum loan limit set by government-sponsored agencies. Investors buy shares in the jumbo pool that generate profit through the interest and principal repayments of these high-value mortgages.

Phonetic

The phonetic spelling of “Jumbo Pool” is: ˈjʌmboʊ puːl

Key Takeaways

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Importance

A Jumbo Pool is an important term in business and finance because it refers to a pool of securitized jumbo mortgages, which are typically larger than the conventional loans bought by government-sponsored entities like Fannie Mae and Freddie Mac. This pool is usually created by investment banks and sold to investors in the secondary mortgage market. The significance of this concept lies in the fact that it can provide a significant investment opportunity for those looking for high-yield, higher-risk assets. It also plays a crucial role in providing liquidity in the mortgage market because it frees up resources for the lending institutions, permitting them to issue more loans to eligible borrowers.

Explanation

Jumbo Pools are a fundamental tool used in the financial market that facilitates liquidity and promotes investment. By its derivative nature, a Jumbo Pool refers to a mortgage-backed security encompassing large-scale (or “jumbo”) mortgages. This instrument is primarily used to securitize, package, and redistribute large mortgages as tradable assets. The originating financial institutions can thus manage their risk exposure efficiently, release capital for further lending, and stimulate the flow of lending and borrowing activities within the economy.The true value proposition of a Jumbo Pool resides in its function of dispersion and diversification. When a substantial amount of large mortgages are clustered together, this eliminates the idiosyncratic risk associated with individual mortgages and mitigates the overall risk layout. Furthermore, the packaged, secure units of a Jumbo Pool are relatively easier to trade in the secondary market, thereby creating liquidity which is fundamental for the continual operation of institutions. Consequently, Jumbo Pools serve to balance risk, stimulate liquidity and promote the cyclicality of credit distribution in the marketplace.

Examples

A Jumbo Pool in finance refers to a pass-through Ginnie Mae II mortgage security, whose individual loans are all larger than $1 million. These mortgages are packaged together and offered as investment securities to investors. Here are three real-world examples:1. Fannie Mae and Freddie Mac: These government-sponsored entities are the most notable examples of organizations dealing with Jumbo Pools. They collect jumbo mortgage loans, package them into mortgage-backed securities, and then sell them to investors, providing liquidity to the housing market. For instance, in 2nd quarter of 2020, Fannie Mae issued about $75.9 billion in single-family MBS including jumbo pools.2. Investment Banks: Large investment banks like J.P. Morgan and Citigroup may also put together jumbo pools. They may provide jumbo mortgage loans to customers, then bundle these loans into jumbo pools, and sell these as mortgage-backed securities to investors seeking the cash flows these loans generate.3. Major Credit Unions: Large credit unions can originate jumbo loans and may amalgamate them into jumbo pools that are sold to investors. An example is The Navy Federal Credit Union, which offers jumbo loans to its members, and these loans can be later packaged as a pool.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Mortgage-Backed Security (MBS)
• Residential Mortgage
• Servicer
• Ginnie Mae
• Loan Limit

Sources for More Information

• Investopedia
• The Balance
• Fannie Mae
• Forbes