TBA Trading and Security Issuance in the Agency MBS Market
59 Pages Posted: 21 Dec 2020 Last revised: 19 Dec 2023
Date Written: December 15, 2023
Abstract
In addition to the standard individual-security-based specified pool (SP) contract, agency MBS are actively traded via the to-be-announced (TBA) contract that sets a uniform price for a cohort of heterogeneous securities. We provide empirical support for the economic effect of TBA trading on MBS issuers' security design: issuers pick low-quality loans and pool them together into few TBA MBS. We then conduct a quantitative analysis and show that TBA-trading-induced strategic MBS design increases issuers' selling revenue by about 55% of the SP transaction costs. Finally, we show that smaller issuers are less able to package low-quality loans separately from high-quality ones and hence benefit less from TBA trading.
Keywords: Cohort, MBS, Security design, Specified pool, TBA.
JEL Classification: D4, G2
Suggested Citation: Suggested Citation