What it is:
A mortgage pool is a group of mortgages in a mortgage-backed security (MBS).
How it works (Example):
Once a lender completes a mortgage transaction, it generally sells the mortgage to another entity. The entities that buy mortgages -- for example, Fannie Mae and Freddie Mac -- package hundreds of mortgages together into a mortgage pool. The mortgage pool then acts as collateral for a mortgage-backed security.
Why it Matters:
An MBS is collateralized by a mortgage pool. Mortgages in a mortgage pool tend to have similar characteristics. For example, they may all be 30-year, fixed-rate mortgages.
MBSs should not be confused with CDOs, or "collateralized debt obligations." A CDO is collateralized by a pool of loans with varying characteristics. For example, they may have different terms (10-year, 15-year, 30-year) and adjustable rates.